US Factories Cut Production To Trim Bloated Inventories

by: Michael Panzner

Despite the optimism that persists on Wall Street, there was more bad news from Main Street last week. Bloomberg writes:

Manufacturing in the U.S. unexpectedly contracted in January as factories cut production and reined in orders to trim bloated inventories.

The Institute for Supply Management's manufacturing index fell to 49.3, the lowest since April 2003, from December's 51.4, the private industry group said today in Tempe, Arizona. Readings less than 50 signal contraction.

The report suggests last quarter's production slump may carry over into 2007 as construction slows and automakers trim inventories of unsold vehicles. A factory setback would restrain growth and keep Federal Reserve policy makers on the sidelines, neither raising nor lowering interest rates, in coming months.

"In the first quarter, we're going to see some big drops in inventory accumulation," said Elisabeth Denison, an economist at Dresdner Kleinwort in New York. "That will drag down economic growth."

Indeed, the graph below suggests that the U.S. economy loosely tracks swings in the ISM Manufacturing index:

ismgdpfeb_1

Another data point that says the future may not be as rosy as the past.

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