Weak output may presage slower growth

The economy showed signs of downshifting as manufacturing cooled last month and consumer spending slowed in September, bolstering expectations of weak growth into early next year.Meanwhile, inflation remained flat in September, according to an inflation gauge that is closely watched by the Federal Reserve.

The latest survey by the Institute for Supply Management confirmed suggestions by the Fed this week that the economy would likely slow in the fourth quarter. Wednesday, the central bank lowered interest rates by a quarter percentage point.

Manufacturers “seem to have run out of our momentum at this point, as far as 2007 is concerned,” said Norbert Ore, chairman of the ISM’s manufacturing-survey committee.

The ISM’s index of manufacturing activity slipped to 50.9 last month from 52 in September. The measure, based on a survey of purchasing managers, put manufacturing growth at its slowest pace since March, reflecting high inventories and rising prices for some materials and supplies. Readings above 50 indicate an expansion in manufacturing activity. Production, a subset of the overall index, plunged after eight months of growth. Strike-related disruptions among auto makers might have been partly to blame, analysts suggested.

Meanwhile, economic growth from abroad continues to prop up U.S. manufacturers. The ISM survey found export demand surging because of the weak dollar, while manufacturers’ imports fell for the first time in nearly six years. The ISM found that manufacturing employment edged higher in October, a positive signal. “You’re going to see very, very modest increases in manufacturing activity for a while,” said Morgan Stanley economist David Greenlaw.

Firms may be feeling early signs of inflationary pressures. Manufacturers indicated they paid more for materials such as oil and steel in October. That could presage higher prices for consumer goods. Inflation had remained tame through much of this year, giving Fed officials latitude to lower interest rates at their last two meetings.

In a separate report, the Department of Commerce said the price index for personal-consumption expenditures rose 0.2% in September after being unchanged in August. Compared with a year earlier, the index gained 2.4%; the August increase was 1.8%.

The Fed’s preferred inflation gauge — the “core prices” which exclude volatile food and energy prices — rose 0.2% in September after climbing 0.1% in August. Measured from a year earlier, core prices rose 1.8% in September, the same as in August. That puts inflation within the 1%-to-2% comfort zone of some Fed officials. The government said income rose 0.4% in September, the same as in August. Consumers showed signs of turning cautious, a potentially worrisome signal for the holiday shopping season. Consumer spending rose 0.3% in September — the slowest since June — after rising 0.5% in August.

Consumer spending may face more pressure if surging oil markets push prices higher at gasoline pumps. The threat to consumer outlays comes as a deepening housing downturn pressures household finances. Home foreclosures in the third quarter rose more than 30% from the second quarter to 446,700 properties nationwide, double the level of a year earlier, RealtyTrac Inc. said yesterday.

Separately, jobless claims edged lower last week, but a tick up in the trend suggests growth may remain sluggish. Initial claims for unemployment compensation fell 6,000 to a seasonally adjusted 327,000 last week, the Labor Department said. The four-week moving average for claims, an indication of the underlying strength of the job market, rose 1,750 to a six-month high of 327,000.

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