Deepening U.S. Slump Envelops Factory Sector


A spreading U.S. economic slowdown seeped into U.S. factory activity in February and March as waning demand more than offset the export benefits of a cheaper dollar, a series of reports Monday showed.

Worker in an Alcoa plant.

A Federal Reserve report on industrial output showed that factories were running at their slowest rate in more than two years during February while a key gauge of factory business in the Northeastern U.S. slumped to a record low in March.

Taken together, the reports reinforced concern that the world's largest economy stalled during the first quarter and was in an actual downturn, though Bush administration officials refuse to concede a recession has started.

The New York Fed said its "Empire State" gauge of general business activity plunged in March to a record minus 22.23 from minus 11.72 in February, far worse than analysts had expected as was the case with the broader industrial production report.

The Fed report showed overall industrial production by the nation's mines, factories and utilities fell by an unexpectedly steep 0.5 percent in February. That followed a slight 0.1 percent January gain and was biggest decline in total output since last October.

Market participants were transfixed by developments in the U.S. financial sector after a weekend collapse of one large firm and new Fed action to add to liquidity and paid scant attention to the latest economic numbers.

The Dow Jones industrial average was off more than 100 points at noon and bond prices were broadly higher as shell-shocked investors moved to the sidelines ahead of a Fed meeting Tuesday that is widely expected to deliver the central bank's next move, a cut in its benchmark federal funds rate.

The stress on factory businesses showed up in manufacturing activity, where output fell 0.2 percent in February after being flat in January. That left the manufacturing sector running at 79.3 percent of total operating capacity, the lowest rate since 79.2 percent in October 2005.

"The implication for the economy is that the manufacturing sector, even though it benefits substantially by a weaker dollar, is in decline, hurt by a domestic slowdown," said economist Cary Leahey of Decision Economics Inc in New York. "This report is saying that the economy is in recession in the first quarter," Leahey added.

The latest signs of economic distress occur against a backdrop of mounting woe in the U.S. financial sector, where the Fed once more stepped in Sunday night to cut a lending rate to try to keep financial markets from panicking and seizing up.

That came hours after a deal was announced for a takeover of ailing investment bank Bear Stearns by JPMorgan Chase for a bargain-basement price of $2 a share.

That deal committed the Fed to fund up to $30 billion of Bear Stearns' less liquid assets and highlighted a loss of investor confidence in the health of the U.S. financial system.

President Bush, who met top advisers Monday morning, said afterward the economy faced "challenging times" but played down fears cited by some analysts that it was confronting its worst set of conditions in decades.

"In the long run our economy's going to be fine," said Bush, who leaves office next January and does not want to leave Republican presidential nominee Sen. John McCain in any worse position than necessary when November elections occur. "Right now we're dealing with a difficult situation."

A Treasury Department report showing that net overall capital inflows to the United States fell sharply in January underlined the skepticism that foreigners have about the direction of the U.S. economy.

Inflows dropped to $37.4 billion from $72.7 billion in December -- not enough to cover the month's $58.2-billion deficit on trade with the rest of the world and therefore likely to maintain pressure on a steadily sliding U.S. dollar.

The only glimmer of hope came in a report from the Commerce Department showing a modest improvement in the broadest gauge of total U.S. trade with the rest of the world.

Soaring U.S. deficits are cited by academic economists as a root cause of deepening problems in the economy because it reflects the propensity of U.S. consumers to spend rather than save and to borrow endlessly from abroad to finance spending.

The U.S. current account deficit narrowed in the fourth quarter to $172.9 billion from a revised $177.4 billion in the third quarter, the Commerce Department said.

The fourth-quarter current account deficit equaled 4.9 percent of gross domestic product, down from 5.1 percent in the third quarter.

The current account is the broadest measure of U.S. trade with the rest of the world and includes goods, services and income flows.