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Cessna employee Dwight Bennett works inside of a jet during a tour of the Cessna business jet assembly line at their manufacturing plant in Wichita, Kansas August 14, 2012. (JEFF TUTTLE/REUTERS)
Cessna employee Dwight Bennett works inside of a jet during a tour of the Cessna business jet assembly line at their manufacturing plant in Wichita, Kansas August 14, 2012. (JEFF TUTTLE/REUTERS)

U.S. factory production slows again Add to ...

The U.S. economy isn’t doing President Barack Obama any favours.

Shrinking manufacturing and construction activity is rekindling fears that the United States may slide back into recession, dragged down by the global slowdown and looming fiscal challenges at home.

A key index of factory activity contracted for a third successive month in August – the sector’s worst performance since early 2009 when the U.S. was still in recession. It also mirrors a manufacturing slump now under way in much of the rest of the world, including China and Europe.

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The Institute for Supply Management’s factory index fell to 49.6 from 49.8 in July and 49.7 in June. A reading below 50 indicates factories are producing less.

Tuesday’s sober outlook was reinforced by a separate report showing that U.S. construction spending fell 0.9 per cent in July from the previous month.

The news comes at a bad time for Mr. Obama, who this week launches his final push for a second term at the Democratic national convention, eager to convince Americans that the country is on the road to recovery after four years of pain. Just as eagerly, Republican presidential nominee Mitt Romney wants to convince Americans that Mr. Obama has left the country poorer, more indebted and less able to create jobs.

“It’s not a good number for the President’s re-election chances,” National Bank Financial economist Krishen Rangasamy said of the sub-50 ISM factory reading. In a research note, he called the ISM report “truly awful” and “reminiscent of the 2009 recession.”

Time is running out for Mr. Obama to convince Americans that they’re better off now than they were four years ago.

August’s job numbers are due out Friday. That likely leaves just one more reading of the job market before the Nov. 6 election.

“The unemployment rate is what tends to resonate with people – the state of the economy and job prospects,” Mr. Rangasamy said. “The numbers haven’t been that great.”

Manufacturing represents a relatively small part of the U.S. economy, at 12 per cent. But until recently it was one of few bright spots in an economy still struggling to gain traction three years after the last recession.

The index also confirms what has been evident for some time: Businesses are cash-rich, but they are reluctant to expand and invest because they are nervous about what lies ahead, including a possible global recession and a looming “fiscal cliff” of sharply higher taxes in the United States. So manufacturers are seeing new orders fall, and they are adjusting production down as a result.

“The uncertainty caused by the recession in Europe, the slowdown in Asia and the fear over the fiscal cliff at home is taking its toll on activity,” said Paul Dales, senior U.S. economist at Capital Economics in London. “Businesses appear to be deciding that doing nothing is the safest and most sensible option.”

Economists estimate that a host of tax measures and budget cuts set for next year – collectively dubbed the “fiscal cliff” – could lop as much as 3.5 percentage points off U.S. gross domestic product. The Congressional Budget Office warned recently that unless rolled back by the new Congress, the changes could spell a return to recession.

The ISM’s subindex of new orders fell from 48 in July to 47.1 in August – the lowest level since April, 2009.

National Bank Financial’s Mr. Rangasamy isn’t predicting another recession for the United States. But he expects the jobless rate to remain stuck above 8 per cent and GDP growth of less than 2 per cent annualized in each of the third and fourth quarters.

What worries Toronto-Dominion Bank economist Martin Schwerdtfeger is that manufacturing is now shrinking in almost all major global markets, including in the once-booming emerging economies of China, India and Brazil. “I’m not saying we are headed into another recession, but the numbers are not very encouraging,” he said.

Follow on Twitter: @barriemckenna

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