More weakness ahead as factory index hits record low

More unpleasant news on the manufacturing front: conditions for New York manufacturers deteriorated in March at the fastest pace on record, with nearly every aspect of the sector showing weakness -- a sign that the sector is undergoing a pronounced contraction.

The Empire State Manufacturing Survey is widely seen as an early indicator of the Institute for Supply Management's March national factory survey. The New York index declined to -38.2 in March from -34.7 in February, the Federal Reserve Bank of New York announced Monday. Economists surveyed by Bloomberg News had expected the index to rise to -32.0.

Weakness across the board

Nearly every component in the indexed displayed weakness: new orders plunged to -44.8 from -29 in February; shipments dropped to -22.7 from -8.1; inventories plunged to -27.0 from -7. Meanwhile, the employment index remained near its recent lows.

Respondents also reported fairly widespread tightening in credit standards and borrowing costs, the New York Fed said, adding that these changes have in turn affected both capital spending plans and hiring plans for a greater proportion of firms than in last autumn's survey. In addition, the futures index -- factories' outlook for the next six months -- remained near an historically very low level.

Economic Analysis: Clearly, demand for manufacturing products continues to decline, as evidenced by the New York region, and that suggests further cutbacks in production and employment. Factories must cut back production to prevent inventories from rising to too high levels. Our nation's factories need a growth catalyst to reverse the contraction, and some of that will come from the fiscal stimulus' infrastructure programs. Even so, more demand will be needed, particularly from international buyers, and to date that overseas demand has not surfaced.

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