Inflation Fear Arises From Positive Data : Economy: Durable goods orders show a sharp increase and Ford posts a record profit, raising specter of Fed rate hike.
The nation’s manufacturing sector is so strong it’s scaring some people on Wall Street.
Ford Motor Co. reported record quarterly earnings Wednesday of more than $1.7 billion, and the Commerce Department said orders for big-ticket durable goods rose a sharp 1.3% last month, triggering a new round of inflation fears that sent bond yields higher and stock prices lower.
The two reports refueled investor concerns that the economy may be running too fast for its own good and that the Federal Reserve might soon raise interest rates again in its continuing battle to keep inflation under control.
Prospects of another rate increase pushed bond yields sharply higher, with the yield on the Treasury’s benchmark 30-year bond climbing to 7.61% from 7.54% on Tuesday. Stocks fell, with the Dow Jones industrial average closing down 15.21 points at 3720.47.
“A lot of factories are running at full speed, and price hikes are starting to filter into the economy,” said Sung Won Sohn, chief economist of financial services giant Norwest Corp. in Minneapolis. “This increases the probability that the Fed will have to raise rates again in the near future.”
The Commerce Department’s report that factory orders for durable goods shot up 1.3% in June from May to a seasonally adjusted $151 billion surprised most analysts, who had expected an increase of only half that. June was the fourth straight month in which orders rose.
The pickup was widespread, with demand for cars and other transportation-related items up a strong 2.3%, orders for industrial machinery up 2.2%, and bookings for electronic equipment up 1.1%.
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Already, many American manufacturers--from auto makers to furniture companies--say their factories are running at full tilt and that the prices they charge to consumers are beginning to rise.
In announcing its record $1.71-billion second-quarter profit Wednesday, Ford noted that its auto plants have been operating overtime during the past few months.
Ford also said its per-car profits have doubled, in part because strong consumer demand has allowed it to raise prices and trim back costly incentive programs. Chrysler Corp. reported its own record earnings last week, and General Motors is expected to announce similarly good news today.
Ford’s second quarter “was double last year and showed better pricing (and) stronger unit sales,” said David Healy, an auto industry analyst for S.G. Warburg & Co. in New York. “You’re going to have to look pretty hard to find a problem.”
But if sales by U.S. manufacturers remain strong, more companies will begin raising their prices and inflation could make a comeback.
“We’ve already seen the auto companies raise their prices, and we can expect some other industries to start raising prices because they’re running at full steam and still can’t keep up with demand,” Sohn said.
“Higher prices means higher inflation for everybody.”
To keep inflation from surging out of control, some analysts say, the Fed has little choice but to raise interest rates again in an effort to keep the economy from overheating.
The Fed has already raised its short-term discount rate four times since February, but the economy has continued to hum along.
The sharp jump in durable-goods orders “reinforces my expectation that the Fed is going to move rates higher again soon,” said Richard Berner, an economist with Mellon Bank in Pittsburgh.
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Although consumers have already begun feeling the pinch of higher prices, the pain could get even worse in 1995, according to a survey also released Wednesday.
New York-based William M. Mercer Inc., the nation’s largest human resources consulting firm, said its poll of 1,800 mid-size and large employers found them planning to raise wages by an average 4.2% in each region of the country next year.
But the Federal Reserve has said it expects inflation to run as high as 3.5% in 1995, so workers who don’t get at least average raises “risk finding themselves in an inflationary squeeze,” said Linda Ison, a Mercer consultant.
Durable Goods
New Orders, in billions of dollars, seasonally adjusted
June, ‘94: 119.0
Source: Commerce Department
