US manufacturing growth almost stalled in October

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NEW YORK, Nov 1 (Reuters) U.S. factory activity nearly ground to a halt in October as tighter credit conditions and a housing downturn proved a drag on production, according to an industry report on Thursday.

The Institute for Supply Management said its index of U.S.

manufacturing fell to 50.9 from 52.0 in September, below forecasts around 51.5 and the weakest since March. A readiparates growth from contraction.

The report comes just a day after the Federal Reserve cut interest rates for a second time in an effort to ward off any adverse effects on the economy from an ongoing credit squeeze.

The ISM data raised fulative 3/4-percent reduction in rates thus far might not be enough, prompting investors to buy bonds and push market interest rates lower.

''It does appear that the impact of the slowdown in the financial, housing and transportation segments has spilled over into manufacturing with the exception being continued strength in new export orders,'' ISM said in its report.

Indeed, the survey's production index dipped into recessionary territory, diving five points to 49.6. The figures highlighted the Fed's dilemma, with the prices paid component pointing to rising inflation even as some of the growth indicators deteriorated.

Preventing a further drop was a spike in exports, which have gotten a strong boost from the dollar's vertiginous decline.

''The details highlight the weakness of the domestic economy and the support being provided by global growth and weak '' said T.J. Marta, fixed-income strategist at RBC Capital Markets.

Stocks were sharply lower on Thursday amid fears that banks might have yet to feel all the pain from tarnished mortgage securities and their derivatives. Credit Suisse was only the latest bank to declare big hits related to that sector.

Separate Fed data also showed asset-backed commercial paper, an important source of business capital, shrinking for a third month running.

REUTERS PDT GC2032

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