U.S. manufacturing contracted in November for the first time in 3-1/2 years, while construction spending fell sharply in October, according to reports on Friday pointing to a slowdown in the U.S. economy, according to Reuters. U.S. and European stocks tumbled, benchmark bonds surged and the dollar slid after The Institute for Supply Management said its index of national factory activity unexpectedly dropped to 49.5 from 51.2 in October, below economists' median forecast for a slight rise to 51.5. It was the first time the index had fallen below 50, which indicates shrinking activity in the sector, since April 2003. The Commerce Department reported U.S. construction spending declined 1 percent in October, more than expected and adding to a growing pile of evidence that the housing market is cooling. Treasury bond prices rallied after the data's release, pushing benchmark yields to 10-month lows, while the dollar extended losses, hitting a fresh 14-year low against the pound and a 20-month low against the euro. "The drop in the ISM index below 50 in November was highly encouraging for the bond market because it told us that in addition to housing, the manufacturing sector may also be faltering," said Anthony Chan, chief economist at JPMorgan Chase Bank in New York. "The path toward easier monetary policy may occur sooner rather than later if such trends persist." A sharper slowdown in the economy could lead the Federal Reserve, which paused a 2-year long campaign of rate rises in August, to begin cutting benchmark short-term rates from the current level of 5.25 percent next year. A dip below the critical 50 mark in the ISM has historically been a reliable predictor of Fed rate cuts, analysts say. The last four U.S. monetary easing cycles began on average three months after sub-50 readings on the ISM, noted Richard Franulovich, currency strategist for Westpac in New York. However, some economists cautioned against writing off the economy too soon after the surprisingly weak report. "Our sense ... is that the weakness is concentrated in the housing- and auto-related sectors while most everything else still looks OK," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. "We are simply not convinced that the economy is weak enough in a broad sense for the Fed to envision easing." The ISM report also showed that new orders, a gauge of future growth, fell to 48.7 from 52.1 in October, while the employment index slipped to 49.2 from 50.8. Prices paid, however, climbed to 53.5 in November, from 47.0 in October, pointing to continued inflationary pressures in the manufacturing sector even as growth slows. Norbert Ore, chair of the ISM survey committee in Atlanta, Georgia, said manufacturing activity appeared to have peaked and November's overall index was likely to be the first of several months under 50. But Ore said he viewed the outlook as a "soft landing" for manufacturing, not a screeching halt to growth. "I think it's way too soon to talk about a manufacturing recession, which would be six consecutive months below 50, unless the inventories are much worse than the data have shown them to be," he said.
