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US factory activity drops in Nov.; first decline in 3 years

Josh Boak Associated Press

WASHINGTON – U.S. factory activity plummeted last month to the lowest level in more than six years, with a stronger dollar and low oil prices cutting new orders and hurting production.

The Institute for Supply Management said Tuesday that its index of factory activity in November dropped to 48.6 from 50.1 in October. Any reading below 50 signals contraction. This is the first time the index has tumbled below that critical level since November 2012.

It now rests at its lowest level since June 2009, a worrisome sign as Federal Reserve officials will consider raising short-term interest rates this month on the understanding that the economy has sufficiently healed from the Great Recession.

“The U.S. manufacturing sector continues to suffer the slings and arrows of outrageous fortune, with `fortune’ being that of the strong U.S. dollar, the oil and gas industry, and soft global growth,” said Jennifer Lee, a senior economist at BMO Capital Markets.

U.S. manufacturers fell into a rut in 2015. A global economic slowdown and a rising dollar have crimped exports, while lower oil prices have led energy firms to slash their orders for steel pipe and other equipment for drilling. Those pressures have steadily curbed growth in factory activity this year and have now pushed the manufacturing sector into contraction.

A measure for new orders dropped to 48.9 from 52.9, while production fell to 49.2 from 52.9. Still, the report showed a rebound in hiring as its employment measure improved to 51.3 from 47.6 a month earlier.

Of the 18 industries tracked in the ISM survey, 10 contracted last month. Among the sectors that shrank were apparel, plastics and rubber, machinery, primary metals, petroleum and coal, electrical equipment and computer and electronic products.

The manufacturing report still suggests that the broader economy is growing, even if manufacturing has become a drag. Any reading above 43.1 in the index is associated with the overall economy expanding.

“We stepped into a pothole here,” said Bradley J. Holcomb, chair of the ISM manufacturing business survey committee. He said the fundamentals should enable a rebound in the coming months rather than a prolonged decline.

Commodity prices have dropped sharply over the past 13 months in the survey. The cheaper costs have improved profit margins for manufacturers, but continued declines would point to less demand and fewer sales.

U.S. manufacturers have been squeezed this year as a strong dollar and weak economies in China and other key foreign markets have cut into exports.

The dollar has appreciated nearly 14 percent against a grouping of major currencies from a year ago. The increase has left manufacturers at a disadvantage. U.S. goods have become more expensive overseas, while lowering prices for imported goods that compete against American products. China has been stuck in a slowdown, as has Brazil. Europe – a major trade partner – remains economically fragile, while Japan has sunk into recession and Canada slipped into a downturn for part of this year.

Companies trimmed their stockpiles of goods between July and September, the government said last week. That cut economic growth during those three months at an annualized rate of 0.6 percentage points, even though overall growth advanced 2.1 percent.

Despite the dismal outlook from the ISM report, there is evidence that some manufacturers are adjusting to these challenging conditions.

The Fed reported that U.S. manufacturing output rose in October for the first time in three months as steel mills, auto plants and computer factories became busier.

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