Consumers Spur Increases in Manufacturing

Manufacturing activity gained steam in February as businesses struggled to keep pace with free-spending consumers, industry and government reports released Monday showed.

The National Assn. of Purchasing Management said its closely watched index rose to 53.1 from 52 in January, with any reading over 50 denoting an accelerating pace of business.

Analysts said busier rates of production, rising orders and longer delivery times indicated businesses were responding to more buying by consumers and were trying to build inventories.

Separately, the Commerce Department reported that January consumer spending increased briskly, by 0.7%, to a seasonally adjusted annual rate of $5.3 trillion.

It was the strongest surge in consumer spending since last October, when it grew by 0.9% and followed a slim 0.2% December gain.

Personal incomes from wages, salaries and other sources like rents and bank interest rose a more modest 0.3% in January to a rate of $6.65 trillion after a 0.7% December rise.

The robust reports renewed concerns on Wall Street that Federal Reserve policymakers may boost interest rates soon to brake the economy and forestall a new round of inflationary pressures.

Stock prices waffled after the reports, falling sharply at first and then regaining much of the losses. At the close, the Dow Jones industrial average had risen 41.18 points to 6,918.92.

But the bond market dipped with the yield on the 30-year Treasury rising to 6.83%, up from late Friday’s 6.80%.

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 it was likely to add to Federal Reserve policymakers’ concern about inflation.

“The boom in the manufacturing sector is putting pressure on prices and also on delivery times,” Sohn said, noting that the NAPM index also showed a decline in employment that likely was related to tight labor markets.

The purchasing managers, whose survey is closely watched because these executives buy vital materials that factories use, said that 13 industries reported paying higher prices in February.

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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 that continues, with Greenspan scheduled to testify again on Wednesday.

The Fed chief said monetary policy might need to be tightened before evidence of price pressures emerges.

“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 annual rate of $589.8 billion after a 0.9% drop in December.

The slight recovery in January building partly reflected a bounce back from exceptionally bad weather in December, notably in the West, where storms and flooding stymied home building and other construction.

But most significant, it also showed a 2.9% pickup in spending on privately financed projects like offices and industrial parks that analysts said reflected businesses’ need for more warehousing 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