Manufacturing, Spending Post Gains
Manufacturing activity gained steam in February as businesses struggled to keep pace with free-spending consumers, industry and government reports released Monday show.
The National Assn. of Purchasing Management said its closely watched index rose to 53.1 from 52 in January. Any reading above 50 denotes an accelerating pace of business.
Analysts said higher rates of production, rising orders and longer delivery times indicate businesses were responding to more buying by consumers and were trying to build inventories.
Separately, the Commerce Department reported that January consumer spending increased a brisk 0.7% to a seasonally adjusted annualized rate of $5.3 trillion.
That is the strongest surge in consumer spending since last October, when it grew by 0.9%. January’s advance outpaced the 0.2% gain for December.
Personal income from wages, salaries and other sources such as rents and bank interest rose a more modest 0.3% in January to a rate of $6.65 trillion, after a rise of 0.7% for December.
The reports of robust activity renewed concerns on Wall Street that Federal Reserve Board policymakers may decide they need to boost interest rates soon to reduce inflationary pressures.
Stock prices waffled after the reports were released, falling sharply at first and then regaining much of the losses. At the close, the Dow Jones industrial average was up 41.18 points to 6,918.92.
But bond prices dipped. The yield on the 30-year Treasury rose to 6.83%, up from 6.80% late Friday, and its highest finish since late January.
Brisk consumer spending at the start of 1997 was putting some pressure on industry.
“Manufacturing industries clearly are trying to crank out as many pieces as they can both to meet demand and to replenish inventories,” said economist Sung Won Sohn of Norwest Corp. in Minneapolis, adding that that factor is likely to figure prominently in Fed policymakers’ thinking on interest rates.
“The boom in the manufacturing sector is putting pressure on prices and also on delivery times,” Sohn said, noting that the report from the purchasing management group also shows a decline in employment probably related to tight labor markets.
The purchasing management group’s survey is closely watched because these executives buy vital materials that factories use. The group reported that 13 industries said they paid higher prices in February.
Fed Chairman Alan Greenspan strongly hinted last Wednesday that the central bank may need to raise interest rates in coming months to contain inflation. His remarks to Congress sent a ripple of unease through financial markets. Greenspan is scheduled to testify again on Wednesday.
“The reports [Monday] are an important piece of evidence to support Chairman Greenspan’s threat last week that all good things come to an end and that we might see higher inflation ahead,” Sohn said.
In a third report, the Commerce Department said new construction edged up in January by 0.4% to a seasonally adjusted annualized rate of $589.8 billion, after seeing a 0.9% drop in December.
The January building figure is in part a reflection of the fact that there was exceptionally bad weather in December, notably in the West, where rains and floods affected home building and other construction.
More significant, analysts said, is that the report also shows a 2.9% pickup in spending on privately financed projects such as offices and industrial parks. Analysts said those results reflect businesses’ need for more warehouse and manufacturing capacity.
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Purchasing Managers’ Index
A rating above 50% indicates an expanding economy.
Feb. 1997: 53.1%
Source: National Assn. of Purchasing Managers
