Manufacturing slumps to 1981-82 recession levels

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By Lucia Mutikani

WASHINGTON (Reuters) - Factory activity dropped in November to its weakest level since the 1981-1982 recession and construction spending slumped in October, data showed on Monday, fanning fears of a protracted economic downturn.

The reports supported expectations that the Federal Reserve would cut its benchmark overnight lending rate by about half a percentage point, to 0.5 percent, at a meeting later this month. That would be the lowest on records dating to mid-1954.

A similar grim economic picture also emerged in Europe, where factories across the continent recorded their worst performance in November since private survey records began more than 10 years ago. In China, manufacturing tumbled, reflecting declining new orders.

In the United States, the National Bureau of Economic Research's business cycle dating committee, the accepted arbiter of U.S. recessions, said the economy slipped into recession in December 2007.

"The U.S. economy has entered an ugly recession. Against this background, we expect the Fed to cut the target rate to 0.5 percent on December 16," said Harm Bandholz, an economist at UniCredit Markets and Investment Banking in New York.

"Amid a faltering economy and mounting deflation concerns, not even this historically low level has to be the end of the Fed's easing cycle."

The Institute for Supply Management's index of factory activity fell to 36.2 in November from 38.9 in October. It was the weakest since 1982. A reading below 50 shows contraction.

Highlighting the deepening U.S. economic slump, an inflation gauge within the ISM report hit its lowest in nearly six decades, new orders dropped to their lowest level since 1980 and an employment index was at the weakest level since 1991.

U.S. stocks skidded on the data, with the Dow Jones industrial average <.DJI> ending down nearly 680 points, or 7.7 percent, at 8,149.09.

U.S. Treasury debt prices surged as signs of the worsening economic outlook boosted their safe-haven appeal and Fed Chairman Ben Bernanke hinted the central bank could become a buyer to push interest rates down further.

"Miserable readings from other manufacturing indexes around the world today -- in China and throughout Europe -- emphasize the depth of the global downturn," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

"The ISM report is consistent with other economic indicators that show the economy contracting at an exceptionally rapid pace."

BERNANKE CALLS FOR ACTION

The U.S. central bank has already cut benchmark overnight rates to 1 percent over the past 15 months.

With rates approaching zero and growing risks of a possible broad decline in prices, the Fed is expected to discuss tools other than interest rates that it could use to spur the economy at its December 15-16 meeting.

Bernanke said the central bank could turn to purchases of longer-dated securities issued by the U.S. Treasury or government-sponsored enterprises and could side-step banks to lend directly to troubled markets.

"Our nation's economic policy must vigorously address the substantial risks to financial stability and economic growth that we face," he said.

The U.S. recession has been driven by a relentless housing market downturn, which a separate report on Monday showed continued unabated in October.

The Commerce Department said construction spending fell 1.2 percent in October as home construction posted its biggest drop in three months.

(Additional reporting by John Parry in New York and Patrick Rucker in Washington; Editing by Dan Grebler)

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