Chicago Purchasers Index Falls to Lowest Since 1982

By Timothy R. Homan

Nov. 26 (Bloomberg) -- A measure of U.S. business activity contracted in November at the fastest pace since April 1982, led by declines in new orders.

The Institute for Supply Management-Chicago said today its business index decreased to 33.8 this month, lower than forecast, from 37.8 in October. Fifty is the dividing line between growth and contraction. The index averaged 54.4 last year.

Businesses are trimming payrolls and cutting back on production as global demand weakens. The deepening credit crisis is causing companies to scale back investments, increasing the likelihood that the U.S. economy will contract for a second consecutive quarter.

“Manufacturing, which was all set to enjoy the mildest recession ever thanks to the weak dollar and strong exports, suddenly finds itself facing the worst business environment in a quarter-century,” Christopher Low, chief economist at FTN Financial in New York, said before the report.

The index was projected to fall to 37, according to the median forecast of 52 economists surveyed by Bloomberg News. Estimates ranged from 32 to 41.8.

Government reports today showed orders for U.S. durable goods fell twice as much as forecast in October, and consumer spending declined by the most since the 2001 recession.

Business, Consumer Spending

A 6.2 percent drop in bookings of goods meant to last several years was the biggest in two years, the Commerce Department reported in Washington. Consumer spending declined 1 percent, according to a separate report from Commerce.

The Chicago report’s measure of new orders fell to 27.2, the lowest reading since July 1980, from 32.5 in October. The production gauge rose to 34.3 from 30.9.

Order backlogs decreased to 28.2 from 39, while the employment index declined to 33.4 from 41.5.

Job cuts are increasing as companies move to offset weak demand. Textron Inc.’s Cessna unit, the world’s biggest maker of business jets, said this month it will cut 665 jobs, or 4.2 percent of its workforce, starting in January as the company scales back production.

“Due to the global economic crisis, the deliveries are not going to be at the levels we expected, and our production output was reduced,” Doug Oliver, a spokesman for Wichita, Kansas- based Cessna, said on Nov. 13.

The Chicago group’s inventories index fell to 41.2 from 56.5 the prior month.

Costs Decrease

The purchasing managers’ measure of prices paid for raw materials decreased to 50.7 from 53.7.

The economy shrank at a 0.5 percent pace in the third quarter, led by a 3.7 percent decline in consumer spending that was the biggest drop since 1980, the government said yesterday. Business spending on equipment and software fell at a 5.7 percent rate, the biggest drop since the first quarter of 2002.

Economists monitor the Chicago index for an early reading on the outlook for U.S. manufacturing, which makes up about 12 percent of the economy.

Manufacturing in the U.S. probably contracted in November for a fourth consecutive month, economists project a Dec. 1 report will show. The Institute for Supply Management’s factory index probably dropped to 38 from 38.9 in October, according to the median forecast in a Bloomberg survey of economists.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net