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Tuesday, 2 January, 2001, 22:44 GMT
Factory output hits Nasdaq
One in five employees in the US work in factories
A closely-watched index of US manufacturing activity fell in December to its lowest level since April 1991.

The manufacturing sector is definitely struggling

Norbert Ore
NAPM chairman

The stock markets dived following the news.

The tech-heavy Nasdaq Composite Index closed down 7.23% at 2,291.86, a fall of 178.66 points.

It was the lowest close for Nasdaq since March 1999, and it was its seventh-largest decline ever in percentage terms.

Several brokerage houses downgraded IT-companies, adding to the index' decline.

The Dow Jones Industrial Average closed 140.70 points, or 1.30% lower at 10,646.15, having finished 2000 with its worst annual performance since 1981.

The broader Standard & Poor's 500 Index fell closed down 37.01 points, or 2.80%, to 1,283.27. This index finished 2000 with its worst performance since 1977.

Factories' importance

Manufacturing accounts for about a fifth of US economic activity and jobs, so the fall brought further proof that growth in the US is slowing.

The Purchasing Managers index fell four points from November to 43.7, according to the latest monthly survey by the National Association of Purchasing Management (NAPM).

Any figure below 50 indicates a contraction.

The news confirmed other gloomy figures which show a sharp slowdown in US economic activity, leading to fears of a "hard landing" which would push the US into recession.

The falling stock market indexes and the gloomy NAPM survey will increase pressure on the US central bank, the Federal Reserve, to cut interest rates when it meets at the end of the month

Factories hit

US factories were hard hit by a dramatic slowdown in economic growth during the second half of 2000.

Tractor transporting steel
The real economy? Most people work in the service sector
Consequently, the NAPM index fell five months in a row during the autumn.

Analysts had predicted the index to come in at 47.0 in December.

In April 1991, the index hit a record low at 42.9.

"The manufacturing sector is definitely struggling at this point," said NAPM chairman Norbert Ore.

"There are few signs of encouragement as we close 2000," Mr Ore added.

A sharp fall in NAPM's new orders index to 42.0 in December from 48.4 in November brought further bad news because it is seen as an indicator of a decline in future activity.

NAPM's prices paid index, seen as a measure of inflation, rose to 61.0 from 56.6.

Two-speed economy

Optimistic observers downplayed the importance of the NAPM survey.

The argue that the US is a two-speed economy in which the manufacturing sector is contracting while the service sector is growing at a healthy pace.

The service sector is the important one because it accounts for about 80% of jobs and economic activity in the US, they said.

And the NAPM survey itself indicated that, although managers believed the manufacturing sector was contracting, the overall economy was growing, albeit at a slower pace than before.

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See also:

02 Jan 01 | Business
A gloomy year for stock markets
02 Jan 01 | Business
Soros warns of global slowdown
01 Jan 01 | Business
Which way for shares in 2001?
29 Dec 00 | Business
US slowdown to affect UK economy
15 Dec 00 | Review to Dot.bomb
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