U.S. manufacturing contracted in November for the first time in three years as the sector buckled under the weight of a strong dollar and deep spending cuts by energy firms, but robust automobile sales suggested the economy remained on solid ground.
Other data on Tuesday showed a sturdy increase in construction spending in October, which should help to offset the drag from manufacturing on fourth-quarter growth. With manufacturing accounting for only 12 percent of the economy, analysts say it is unlikely the persistent weakness will deter the Federal Reserve from raising interest rates this month.
“Manufacturing is being pummeled by the stronger dollar and the weakness of global demand, but the other 88 percent of the economy continues to perform well. This won’t prevent the Fed from raising interest rates at the mid-December meeting,” said Steve Murphy, a U.S. economist at Capital Economics in Toronto.
The Institute for Supply Management said its national factory index fell to 48.6 last month, the weakest reading since June 2009 when the recession ended, from 50.1 in October. While a reading below 50 indicates a contraction in manufacturing, the index remains above 43.1, which is associated with a recession.
Factory activity has also been undercut by business efforts to reduce an excessive inventory build, which is putting pressure on new orders. The ISM said a gauge of new orders tumbled 4 percentage points to 48.9 last month.
Inventories at manufacturers continued to shrink and their customers reported stocks of unsold goods were too high for a fourth consecutive month.
Ten out of 18 manufacturing industries, including apparel, machinery, primary metals, electrical equipment, appliances and components and computer and electronic products reported contraction in November.
Manufacturers cited dollar strength, slower Chinese and European growth and lower oil prices as headwinds. Recent data on business capital spending plans and factory output had offered hope that the worst of the sector’s woes were over.
But with auto sales and construction spending remaining robust early in the fourth quarter, economists still expect gross domestic product to expand at around a 2 percent annual pace, almost matching the third-quarter pace.
Early reports showed strong auto sales growth in November as Americans snapped up sport utility vehicles. General Motors Co (GM.N) said it expected industry sales to rise to a 18.2 million-unit pace.