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February 1, 2001

U.S. NAPM Jan. Factory Index Falls to 41.2 From 44.3
By Carlos Torres, Bloomberg

Manufacturing Sector Already in Grip of Recession ... Weiss comments

WASHINGTON - An index of U.S. manufacturing fell in January to its lowest point in almost 10 years, signaling a recession in the overall economy, a survey of industry executives showed. Prices paid for raw materials rose.

The National Association of Purchasing Management's factory index fell to 41.2 last month from 44.3 in December. The indexes gauging production and orders fell to their lowest points in about 19 years.

January is the first time since March 1991 the overall index has fallen below 42.7 -- the point NAPM says corresponds with a recession in the broader economy. This month's reading is consistent with a 0.6% annualized contraction in gross domestic product, NAPM said.

"It means the economy is awfully sick," Mark Vitner, an economist with First Union Corp. in Charlotte. "We are either in recession or right at the doorstep. The NAPM report is consistent with recession, the durable goods report was consistent with recession, and GDP showed us right on the edge."

The report showed inflation picking up. An index of prices paid for raw materials rose to 65.7 in January from 62.2. Before the report, analysts surveyed by Bloomberg News expected a January NAPM reading of 43 and a prices-paid index of 59.

The January new orders component of the NAPM index fell to 37.8 from 42.5 in December signaling manufacturing may stay weak in the coming months. January's orders index was the lowest since it was 32.8 in November 1981. New orders carry the greatest weight and account for 30% of the overall index.

NAPM's production index, a gauge of current output, fell to 37.9 from 43.5 in December. January's production index was the lowest since it was 37.2 in May 1982. The employment index fell to 43 from 44.1.

The NAPM report confirms exactly what we said yesterday. A one-two punch of recession and inflation is going to hammer the economy mercilessly over the next few months.

The cycle has already begun in the manufacturing sector. The manufacturing sector has started laying off workers in droves and has felt the brunt of the slowdown in capital spending by businesses. At the same time, inflation levels rose. That means new products will carry a higher price tag once they reach the consumer.

But recession isn't isolated to the manufacturing sector. When the NAPM index has a reading below 50, a recession could still be limited to manufacturing, but when the index breaks below 42.7, it indicates the overall economy is in a recessionary slump. The January reading stands at 41.2 -- ouch! Fed Chairman Alan Greenspan can call it anything he likes, but it looks like a recession to us.

Consumer confidence has been plummeting for five months ... the price of goods is on the rise ... the growth in consumer spending is slowing to a crawl ... the growth in gross domestic product is yanking the emergency brake. As this slowdown spreads, most sectors of the economy will be crippled.

And don't expect rate cuts from the Fed or new tax cuts to suddenly grease the wheels and keep the economy rolling. Rate cuts take months to ripple through the economy, and tax cuts take even longer. By that time, the recession and inflation cycle will already be doing major damage.

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