Factory Orders at Record High; Spending and Confidence Grow
The U.S. economy is roaring back from a midyear lull, according to reports released Friday that show consumer spending was up last month, manufacturing is picking up steam and consumer confidence is marching higher.
That combination was too strong for many investors, and U.S. stock and bond prices sank for a second consecutive day. The concern is that the Federal Reserve Board will move to decelerate the economy with higher interest rates. The Fed had expected the economy to slow in the second half of the year.
“It’s the best of both worlds if you’re a manufacturer, but it’s the worst of all worlds for the Federal Reserve,” said Hugh Johnson, chief investment officer at First Albany Bank in Albany, N.Y.
Orders placed with U.S. factories rose in July to the highest level on record, led by demand for electronics and industrial machinery, Commerce Department figures show. The 1.8% increase for the month was double what analysts had expected.
In another sign of strength, the Purchasing Management Assn. of Chicago said its overall index soared to 60.0 in August from 51.2 in July. An index reading higher than 50 means manufacturers reporting improved business outnumbered those reporting deteriorating conditions.
The robust factory outlook may be linked to expectations that American consumers will continue to pick up the pace of their consumption. Support for that notion came in another report Friday, this one from the University of Michigan showing that its final index of consumer sentiment for August rose to 95.3 from 94.7 in July. It was the highest reading since January 1995.
For many investors, those signs of an economy powering ahead overshadowed an early-morning Commerce Department report that showed consumer spending rose only 0.2% last month. That’s an improvement from June’s decline of 0.4%, but it’s still only half the 0.4% average monthly increase for the first seven months of the year. Weak spending on autos and other big-ticket goods restrained the July spending increase.
National Assn. of Manufacturers President Jerry Jasinowski, who for months has been arguing against a Fed rate increase, said July’s small spending rise leads him to conclude that investors are overreacting.
“The message is clear: The slowdown in the third quarter has already begun,” he said. “With incomes slowing sharply and households facing heavy debt loads, consumers are likely to retrench.”
In Cleveland, Kenneth Mayland, chief economist at KeyCorp, suggested that consumer spending started off the third quarter at a weaker pace than the second quarter. “I’m not sure all the strength is there,” Mayland said.
Personal income, meanwhile, inched up just 0.1% in July--the weakest showing since January and a big comedown from June’s 0.9% increase and the 0.5% average for the first seven months of the year.
The benchmark 30-year Treasury bond fell almost a full point. The yield on the bond rose to 7.12% from 7.03% on Thursday. Stocks also tumbled. The Dow Jones industrial average--after slumping almost 60 points--fell 31.44 points to close at 5,616.21.
Because it accounts for two-thirds of economic activity, consumer spending provides a key indicator of where the economy is going. Based on the findings of the last two months--June’s consumer spending decline turned out to be twice as large as the 0.2% loss originally estimated a month ago--the message from Friday’s Commerce Department spending report was mixed.
The department also said that disposable income, or money left over after taxes, increased 0.1% in July, while the savings rate was unchanged from a month earlier at 5.3%.
Still, retail sales have increased since July’s stallout, which analysts linked to people staying home to watch television coverage of the Olympics. Other recent economic indicators suggest consumers “have both the will and the means to finance a moderate rebound in consumer spending,” said Scott Brown, an economist at Raymond James & Associates in St. Petersburg, Fla.
Underscoring that view, consumer confidence in the economy advanced to a six-year high in August, according to a monthly Conference Board survey of 5,000 households. New-home sales are also on the rise.
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Personal Spending
Seasonally adjusted annual rate, in trillions of dollars:
* Source: Commerce Department
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* RATE UNCERTAINTY: Officials are unsure about where the economy is headed. D3
