Factory Survey Shows Inflation at Raw Materials Level

The economy cooled in August but not enough to put the freeze on inflation, according to a widely followed survey of industrial companies released Thursday.

The National Assn. of Purchasing Management’s report for August shows activity at the nation’s factories expanded at a much weaker pace than at any time in the last eight months, suggesting that the economy is slowing.

But the survey, considered a key economic forecasting tool, revealed that the number of companies reporting higher prices for raw materials rose to the highest level in six years, suggesting that inflation pressures still threaten the economy because those price increases are likely to be passed on to consumers.

Economists said the data doesn’t necessarily mean a spiral of higher prices is imminent. Rather, they said, the survey reflects the inflationary effects of strong economic growth in the first half of the year. “We probably won’t see a real slowdown in prices until a few months down the road,” said Bernie Markstein, chief economist at Meridian Bancorp. in Reading, Pa.

The purchasing managers report coincided with the release of other economic data that presents a mixed picture of the economy.

Weekly unemployment insurance claims reported by the Labor Department hit a six-week high, as merchants and other businesses began laying off seasonal employees. Leading retailers said August sales were mixed. The Commerce Department said construction spending rose moderately in July.

The purchasing managers manufacturing index, based on responses from 300 large U.S. industrial firms, fell to 56.2% in August from 57.8% in July.

An index reading above 50% indicates an expansion, while a reading below 50% indicates a decline.

Factory production grew at a lower level than in July and new orders were down at more companies than in the month before, the survey shows.

But the purchasing managers price index, closely watched by financial markets, jumped to 74.5% from July’s 73.1%, its highest level since August, 1988. It was the fifth month in a row that the index rose.

“This increase in material prices is one of the strongest concerns of purchasers,” said Ralph G. Kauffman, chairman of the association’s business survey committee.

The price component roiled financial markets because stock and bond investors tend to sell at signs of inflation, which can erode the value of investments such as Treasury bonds and other securities.

Unlike professional securities traders, most economists weren’t alarmed by the price component, because they believe that the impact of higher interest rates has not yet caught up to industrial firms.

Markstein and other economists said that materials prices were higher in August because suppliers were still seeing heavy demand for goods from factories whose businesses were humming in the first six months of the year.

But as higher interest rates cause consumers and corporations to scale back their spending and expansion plans, factories will become less busy and demand for materials will subside, driving prices down.