Business Activity in U.S. Shrank in October for Second Month

Business activity in the U.S. unexpectedly contracted in October for a second month, adding to signs manufacturing has retreated from its central role in the economic recovery.

A gauge from the Institute for Supply Management-Chicago Inc. rose to 49.9 from 49.7 in September. A reading of 50 is the dividing line between expansion and contraction. The median estimate of 54 economists surveyed by Bloomberg was 51.

The prospect that lawmakers will be unable to avert the $607 billion in automatic tax increases and spending cuts slated to take effect at the beginning of 2013, combined with a global slowdown, may restrain activity for the rest of the year. Nonetheless, gains in U.S. consumer spending over the past two months may limit the damage and help manufacturers overcome the uncertainties surrounding domestic fiscal policy.

“The manufacturing sector is struggling,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, who forecast a reading of 49.4. “You’ve got global weakness which is hurting exports. You’ve got uncertainty with the fiscal cliff, which may keep people cautious.”

Projections in the Bloomberg survey ranged from 49.1 to 54.3.

Stocks held earlier gains after the report as equity markets resumed trading for the first time this week after Hurricane Sandy. The Standard & Poor’s 500 Index rose 0.3 percent to 1,416.58 at 10:08 a.m. in New York.

Report Components

The group’s gauge of new orders rose to 50.6 from 47.4. A measure of employment declined to 50.3, the weakest since December 2009, from 52. The production index fell to 51.8 from 55.4 in September, today’s report showed.

Gross domestic product rose at a 2 percent annual rate from July through September, up from a 1.3 percent pace in the prior quarter, the Commerce Department reported last week. Corporate spending on equipment and software was unchanged, the weakest reading in three years, and companies are cutting forecasts on slowing growth in Europe and Asia.

“There’s just a great deal of uncertainty and there’s not a lot of demand,” Stephen Roell, president and chief executive officer of Johnson Controls Inc., an automotive and building supplier in Milwaukee, Wisconsin, said in an Oct. 30 earnings call. “I mean, there’s not a lot of growth in the underlying economy.”

Chicago Report

Economists monitor the Chicago index and other regional manufacturing reports for an early reading on the national outlook. The Chicago group includes manufacturers and service providers with operations in the U.S. and abroad, making the gauge a measure of overall growth.

Other regional reports have been mixed. Manufacturing in the region covered by the Federal Reserve Bank of Philadelphia expanded in October, while factories in the New York Fed area contracted for a third month.

The Institute for Supply Management’s factory index for October fell to 51 from 51.5 the prior month, signaling a slower pace of expansion, according to the median forecast of economists surveyed by Bloomberg before tomorrow’s report.

Businesses remain concerned about the package of tax increases and government spending cuts -- the so-called fiscal cliff -- that will begin to take effect in January unless Congress acts. The outcome of next week’s presidential election also is too close to call, with President Barack Obama and Republican challenger Mitt Romney in a tight race in a handful of swing states that will decide the race.

Industrial ‘Caution’

“We have seen an industrial slowdown,” said Gregory Kenny, president and chief executive officer of General Cable Corp., maker of wire and cable products in Highland Heights, Kentucky, on an Oct. 30 earnings call. “I would look for the U.S. to start opening up early next year no matter who wins. But I think we’ve talked ourselves into caution industrially.”

American consumers might help overcome that slowdown. Household purchases, the biggest part of the U.S. economy, climbed more than forecast in September. Consumer spending rose 0.8 percent, the most since February, after advancing 0.5 percent in August, the Commerce Department reported earlier this week.

Cheaper gasoline, a lower unemployment rate and an improving housing market are lifting moods. The Bloomberg Consumer Comfort Index reached a six-month high in the week ended Oct. 21. The Thomson Reuters/University of Michigan final gauge of sentiment advanced to the highest level since September 2007, before the recession began.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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