Oct. 1--A key measure of nationwide manufacturing activity unexpectedly plunged in September -- falling to its lowest reading since the recession-racked month of October 2001- as producers responded to weakening consumer demand by slashing output.

"The credit crunch is hitting home," said Joel Naroff, head of Naroff Economic Advisors. The manufacturing sector, which has been relatively stable all year, "has taken a major turn for the worse," the economist said.

"The economy may be starting to unravel," he added.

The Institute for Supply Management's monthly manufacturing index has been bumping right around its neutral level of 50 for the past several months, and most experts had been expecting the measure to dip fractionally in September, to 49.5 from August's 49.9 reading.

Instead, the index took its biggest fall in more than 24 years, dropping to 43.5 on major production cuts, softening orders and falling industry employment levels.

The manufacturing industry has been in recession since October of 2007 and seen moderate declines until recently," said Daniel J. Meckstroth, economist with the group Manufacturers Alliance/MAPI trade and information group. But September's "sudden and substantial decline" in the ISM reading, he said, "indicates that the energy shock, housing collapse and financial crisis has reached a point where the recession has spread to the general economy.

MAPI, he said doesn't expect any recovery in manufacturing activity until mid-2009.

A number of observers suggested that September's nosedive overstated the decline in the economically crucial sector. Hurricanes obliged a number of Gulf of Mexico-area producers to suspend operations, for one thing, and about 27,000 unionized machinists launched a lengthy (and ongoing) strike at Boeing Co. in September, freezing the aircraft maker's commercial-jet production.

Even though some of the September ISM decline may be attributable to such temporary disruptions, however, it is clear that "manufacturing is weakening," said Ryan Sweet of Moody's Economy.com. "Businesses are slamming on the production brakes," he observed, and "final demand is weak and will get weaker as the economy grinds down this (fourth) quarter."

The ISM data also showed a big falloff in inflationary pressures, as is typical when demand weakens. But while that opens the door for more aggressive interest-rate cuts by the Federal Reserve, noted BMO Capital Markets analyst Douglas Porter, "there's no downplaying these dismal results."

The ISM index "has proven to be a reliable cyclical indicator," echoed Barclays Capital economist Julia Coronado, "and today's report suggests that the manufacturing sector, which has held up reasonably well to date, may be entering a period of more substantial contraction and may be an indication that recent financial market turmoil has dampened business activity more broadly."

The full impact of the credit-market disruptions that occurred in the latter part of September likely won't show up in production and manufacturing data until future months, economists noted.

jpmiller@tribune.com

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