U.S. manufacturing contracted for a second consecutive month in October as production declined.

The Institute for Supply Management’s manufacturing index dropped to 48.5 in October, the lowest reading this year, and down from 49.5 in September.This suggests that the contraction in manufacturing is deepening.

The index failed to meet expectations, which called for a reading of 49.5. RBC Financial Group says that the only bright spot is an increase in the index for new orders above 50.

TD Bank says that an uptick in orders “may herald some improvement in the months ahead, but the domestic new orders sub-index is still barely above 50 — sharply down from the 60-readings it was showing as recently as June — while the uptick in export orders seems inconsistent with signs of weakness in the global economy.”

CIBC World Markets indicates that uneasiness surrounding the West Coast dock workers strike and the possibility of war with Iraq led to managers’ concerns which hurt the ISM reading. “Having shown little change over the past 4 months, the ISM Index points to a continuing sluggish trend for American factories,” it says. “October’s ISM supports other data showing the manufacturing sector is in a stall after leading growth for the first half of the year. Added to the weakness in goods sector payrolls, which showed manufacturing employment declined for the 27th consecutive month in October, the data give enough ammunition for the Fed doves to make a case for a rate cut next week, and a 1% fed funds rate before the end of Q1.”

BMO Nesbitt Burns agrees that the ISM report provided more evidence pointing to a Fed rate cut next week. “The U.S. data are continuing to confirm a weakening economy. The chances are growing that the Fed is likely to cut interest rates next Wednesday, and probably by 50 basis points. Markets did not believe today’s data were bad enough to force the Fed to ease with 100% certainty. It’s up to the FOMC’s interpretation of downside risks and the power they have to reduce them by further rate cuts from an already low level.”

RBC agrees that, “the somewhat weaker than expected ISM index further supports the view that a Federal Reserve interest rate cut will occur on November 6. In any case, such an outcome is now fully priced in regardless of its appropriateness.”