Article from the Wall Street Journal:

Manufacturing Sectors Across the World Slow Down in September; Germany and Taiwan Shed Pace, U.S. Output Ticks Up

From Taiwan to Germany, the world-wide manufacturing sector showed signs of slowing in September, new data showed Monday. Even in China, the red-hot growth that helped sustain the global recovery has begun to cool.

To be sure, manufacturing is still growing in many countries, including the U.S., where a survey of purchasing managers showed manufacturing output accelerating in September. The Institute for Supply Management's manufacturing index rose to 51.6 in September from 50.6 in August; readings above 50 on the 100-point scale indicate growth.

But the purchasing managers' report also showed new orders contracting, a sign manufacturers are working off a backlog from earlier in the year rather than attracting new business. And a global manufacturing index compiled by J.P. Morgan fell to its lowest level since June, 2009. 

 A worker last month at a textile mill in China's Anhui province. China has seen growth slow in its factories amid global sluggishness in the sector.

A global manufacturing slowdown would have profound implications for the U.S.'s fragile recovery. Overseas profits have boosted the bottom line at U.S. manufacturers even as domestic sales have stalled. Now, that growth also could be in question.

"Manufacturing's been the star player in the recovery, but it's starting to show signs that it may be going on the disabled list," said Jonathan Basile, an economist with Credit Suisse in New York.

The trend crosses continents and international boundaries. Germany's manufacturing sector showed its weakest growth in two years in September. Growth in Russia remained stagnant in September after contracting in August. Manufacturing sectors in Brazil and Taiwan, already shrinking, fell further into recessionary territory in September. Japan's factories, which boomed after March's earthquake, saw production decline for the first time since April. South Korea's manufacturing activity contracted at its sharpest pace in 11 months in September.

LG Hausys America, an Atlanta-based maker of acrylic sheets for countertops and other uses, has kept its factory busy on a backlog of orders from earlier in the year, marketing director Jim Rogers said. But the company, a unit of Korean industrial conglomerate LG Corp., hasn't seen its usual September bump in new orders as homeowners wrap up renovations before the holidays. "Right after Labor Day we saw a significant drop in volume, which is not typical," Mr. Rogers said.

"It's just a picture of companies facing very weak demand growth, they've slowed output growth down to rein in inventories," said David Hensley, a J.P. Morgan economist. "I would figure September, October, November production data are going to look very weak."

The picture was grim in Europe, where an index of manufacturing activity in the 17-country Euro zone on Mondayhit its lowest level in over two years. The index, compiled by research firm Markit Economics, showed activity slowing in every country except Germany. New orders dropped at their fastest rate in 27 months.

Economic weakness in Europe and the U.S. is hurting Asian manufacturers, which rely on demand from Western consumers. Taiwan's manufacturing index fell in September to its lowest level since January 2009, Markit said Monday. And Markit said Chinese manufacturing contracted slightly, although another index showed marginal growth.

"You've got this dramatic slowing in global demand for manufactured goods in two key markets in the U.S. and Europe," said Nariman Behravesh, chief economist for the consulting firm IHS. "So much manufacturing in places like China is geared toward U.S. and European markets."

Most data indicate the U.S. economy continues to grow, albeit very slowly. Automobile sales rose in September, driven by a rise in truck and SUV sales, the latest sign that consumers have continued spending despite bleak economic news. Separate data released Monday showed construction spending rose unexpectedly in August, gaining 1.4% due mostly to state and local government projects..

The manufacturing data also showed areas of strength. The overall manufacturing index rose more than economists had expected, and the Institute of Supply Management report showed growth in 12 of the 18 sectors surveyed. Manufacturers said they were adding jobs, a positive sign heading into Friday's release of September unemployment data. But many economists said the data masked an underlying weakness in the manufacturing sector. New orders—a key sign of what factories will produce in coming months—held steady at 49.6, below the level that indicates growth.Manufacturers' backlog of orders shrank, while customers' inventories rose, signs that customers aren't placing new orders as old ones are filled.

"New orders are really the thing that moves this whole sector," said Brad Holcomb, chairman of the committee that conducts the survey. "Production is high and it's returning to growth... but it's being used to work off a backlog of orders, which is contracting."

Even companies that are doing well are seeing caution among customers. Overton Industries Inc., a Mooresville, Ind., maker of tooling and dies, expects 2011 sales to be up 5% to 7% from the $12 million recorded last year, said Ron Overton, the company's president. Most of Mr. Overton's customers—largely in the auto and defense sectors—say they need his products now, but many are less certain about the months ahead.

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