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New Batch of Figures Indicate Drastic Slowdown

June 02, 1995|From Times Wire Services

WASHINGTON — A flurry of fresh economic data Thursday, including figures showing a shrinking manufacturing sector and the sharpest drop in factory orders in nine months, suggests a slowdown more drastic than analysts had suspected.

The National Assn. of Purchasing Management said its monthly index of manufacturing activity fell to 46.1 last month from 52.0 in April--the first time in 21 months that it has dropped below the critical level of 50, which marks the dividing point between growth and contraction.

The Commerce Department reported that new factory orders fell 1.9% in April to a seasonally adjusted $293.96 billion after declines of 0.4% in March and 0.3% in February. It also reported that increases in personal income and spending slowed.

As consumers have cut back on spending, inventories have risen. As a result, factories have cut production and scaled back operations.

Not since the March-May period of 1993 have orders dropped for three straight months. In addition, shipments of finished products and order backlogs weakened from March.

"Clearly the economy is losing momentum more rapidly than was anticipated," said economist Sung Won Sohn of Norwest Corp. in Minneapolis. "Consumers have cut back on their purchases of big-ticket items like new cars, and that is one reason manufacturers are cutting back, and they will in turn cut jobs."

The government's report on personal incomes and spending during April notes that manufacturing payrolls fell that month at a rate of $7.4 billion a year, more than twice the $3.6-billion rate of decline in March.

That was partly because workers in the auto industry received large bonus payments in February and March and none in April. But that also reflected the industry's problem with weaker sales.

Overall incomes rose just 0.3% to a seasonally adjusted annual rate of $6.01 trillion in April, the smallest rise since November, when they were flat. The revised increase for March was 0.5%.

Spending also rose 0.3% in April, to $4.82 trillion--less than half the revised gain of 0.7% in March. Because consumer spending fuels two-thirds of the national economic activity, as spending slows, so does the economy.

"The trend is pretty well set now: slower economic growth along with weaker income growth and cutbacks by producers," Sohn said.

He said Federal Reserve Board policy-makers might be forced to reverse course after seven interest rate hikes and may cut rates by August to try to stimulate economic activity and avert recession.

The possibility of a rate cut pushed the Treasury's 30-year bond yield down 0.04 percentage point to 6.60%, a 15-month low, and boosted stock prices to another new record, with the Dow Jones industrial average rising 7.61 points to 4,472.75.

Economist Gordon Richards of the National Assn. of Manufacturers said companies "fundamentally overpredicted" the strength of consumer demand this year and are paying the price.

"The result is that business is facing a glut of unsold goods while consumers have been forced to scale back purchases," Richards said. "Production will have to be curtailed until surplus stocks are sold off."

The purchasing managers said their index of manufacturing activity plunged to its lowest level in four years, since its reading of 44.5 in May, 1991, shortly after the last recession ended.

At every stage--from new orders to production to backlogs, inventories and employment--activity continued to weaken last month from earlier in the year, the group said.

The number of Americans filing initial jobless claims rose to a four-month high, while the moving average for claims climbed to the highest level in more than 2 1/2 years, government figures show. New claims for state unemployment insurance rose by 9,000 to a seasonally adjusted 389,000. In California, however, there were 4,530 fewer layoffs.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Factory Orders

Total new orders, in billions of dollars, seasonally adjusted:

April 1995: $294.0

Source Commerce Department

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