Credit index: Manufacturing, service sectors showing signs of contraction
Amid fears that the nation’s economy is headed for recession, a major credit index showed economic contraction in the manufacturing and service sectors for the first time in five years. According to analysis from trade credit insurer Euler Hermes ACI , a potent combination of negative economic factors could lead the Federal Reserve to once again lower interest rates in an attempt to revive the sharply slowing economy.
In his monthly commentary regarding a national survey of credit managers in the manufacturing and service sectors, Euler Hermes ACI Chief Economist Daniel C. North says the survey data showed a decline for the third straight month in the manufacturing and service sectors.
“Although the drop was relatively small, six of the 10 index components fell, leaving five components below the 50 level. This indicates economic contraction,” says North.
To explain the reason for the continually deteriorating business conditions, North continues to point to a number of negative headwinds facing the U.S. economy.
“Gasoline prices are high, housing prices are low, the dollar is crumbling, consumer confidence is plummeting, holiday sales have been mixed at best, credit is drying up, bankruptcies and foreclosures are on the rise, the employment situation is decaying, and conditions in the housing industry are getting worse,” he says. “It is a potent combination that could lead the economy into a recession in the first half of next year.”
However, North concedes that both the economy and the nation’s business environment have remained resilient so far, but “cracks are starting to show, and the Fed will almost certainly cut the Fed Funds rate again at its December 11 meeting in an effort to forestall a recession.”
In all likelihood, North believes the Fed will have to continue to cut the Fed Funds rate well into 2008—perhaps as low as 3.5 percent.
North says the manufacturing sector manufacturing sector fell slightly in November, with bankruptcies plummeting 7.9 percent—the second largest drop on record. “The bright spot of the manufacturing report was that the sales component erased all of last month’s 5.2-percent fall,” he says.
As has been the case for months now, comments from the survey participants were mostly about the terrible conditions in the housing market, but this month, North explains, “There are unhappy comments from other industries as well, indicating more widespread weakness.”
For example, one manufacturer of nuts, bolts, and screws, says manufacturing “is cutting back to a four-day week.” According to a petroleum refiner, “We are seeing stress across industries due to rising energy and raw material costs.” And a manufacturer of cookies and crackers notes how the housing crisis is now directly affecting even the food industry: “We’re affected by the trauma of home builders, mortgage banks, and title companies.”
Meanwhile, North said the service sector decline was widespread as seven of the 10 components fell. As with the manufacturing sector, bankruptcies led the way down, falling 6.0 percent.