Business Activity Shrinks For First Time Since 2009

(Bloomberg News) Business activity in the U.S. unexpectedly contracted in September for the first time in three years, adding to signs manufacturing will contribute less to the economic recovery.

The Institute for Supply Management-Chicago Inc. said today its business barometer fell 49.7 this month from 53 in August. A reading of 50 is the dividing line between expansion and contraction.

Uncertainties surrounding domestic fiscal policy and weakening economies in Europe and China may prevent companies from adding to headcount and ramping up production. Slow growth prospects prompted the Federal Reserve to announce more accommodation measures earlier this month in a bid to help spur the three-year-old expansion.

"The chain that links all this stuff together is just a loss of confidence as we head toward the end of the year in fiscal policy," said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York, whose forecast of 50 was the closest in the Bloomberg survey. Businesses "have been cutting back on their investment spending."

The median estimate of 57 economists surveyed by Bloomberg forecast the gauge would fall to 52.8. Projections ranged from 50 to 54.5.

Other reports showed consumer spending barely rose in August after adjusting for inflation and household sentiment climbed in September to a four-month high.

Household purchases rose 0.5 percent, matching the median estimate of economists surveyed by Bloomberg and the biggest gain since February, according to data from the Commerce Department. The gain mainly reflected a 0.4 percent jump in prices, the biggest since March 2011, leaving so-called real spending up 0.1 percent.

The Thomson Reuters/University of Michigan final sentiment index rose to 78.3 this month from 74.3 in August. Economists projected a reading of 79 after a preliminary reading of 79.2 issued earlier this month, according to the Bloomberg survey.

Stocks dropped after the reports and as investors awaited results of stress tests on Spanish banks. The Standard & Poor's 500 Index fell 0.6 percent to 1,437.84 at 10:24 a.m. in New York.

The Chicago group's gauge of new orders dropped to 47.4 from 54.8. The employment measure declined to 52, the weakest since March 2010, from 57.1 the prior month. The production gauge fell to 55.4 from August's reading of 57.4, today's report showed.

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

Factory activity in the New York area contracted more than forecast in August, to its lowest level in more than three years, and production in the Philadelphia region shrank for a fifth month, Fed reports showed this month.

The ISM's monthly national factory index probably climbed to 50 in September, the threshold of expansion and contraction, according to the median projection in a Bloomberg survey ahead of the Oct. 1 report. Like the Chicago survey, a reading above 50 signals expansion.

Unemployment exceeding 8 percent for 43 consecutive months -- the longest stretch in the post-World War II era -- remains a headwind for factory production while fiscal crises in Europe and slower growth in China are holding back demand.

Household spending increased at a 1.5 percent annual rate in the second quarter, the lowest in a year, Commerce Department data show. Companies' spending on equipment and software rose at a 4.8 pace over the same period, the weakest since the third quarter of 2009.

The lack of progress in the labor market persuaded the Fed to announce further accommodation earlier this month. The policy makers said the Fed will expand holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month as it seeks to boost growth and reduce unemployment.

Lackluster orders continue to damp manufacturers' expectations. Shares of electronics supplier Jabil Circuit Inc. of St. Petersburg, Florida, dropped by the most in more than a year after the company forecast fiscal first-quarter sales that fell short of analysts' estimates.

Lingering concerns about the January "fiscal cliff" -- when more than $600 billion in automatic tax increases and spending cuts will take effect if Congress doesn't act -- are restraining businesses such as AT&T Inc. and their long-term planning.

"You have to plan on the known, and the known is that unless there is some kind of legislative fix, taxes are going to go up," Randall Stephenson, the company's chief executive officer, said at a Sept. 19 conference. "It's manifesting itself in our top-line growth, it's manifesting itself in orders on the fixed-line side."