The rebound in the nation's manufacturing sector accelerated in June and more factories reported paying higher prices for materials, a survey of corporate executives showed Thursday.
The National Assn. of Purchasing Management said its factory index rose to 57 last month--its highest level since July 1997--from 55.2 in May. Index readings above 50 mean most manufacturers surveyed reported improved business.
"Manufacturing is rebounding because the red-hot economy is being fueled by consumer spending," said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis. "And some of this is also coming from demand overseas."
The latest evidence of robust growth means traders will be watching today's June unemployment report for indications of further tightening in the labor market. Another report Thursday showed that the number of first-time jobless claims filed last week fell 5,000 to 299,000.
Coming one day after the Federal Reserve raised its benchmark short-term interest rate and adopted a neutral stance toward possible future rate increases, the manufacturing activity report spooked the bond market Thursday. Traders fear the Fed's restraint might have been premature.
"This points up the risks that the Fed faces if the economy does not slow from its current breakneck pace," said Joel Naroff, head of Naroff Economic Advisors in Holland, Pa.
The yield on the benchmark 30-year U.S. Treasury bond, which sank from 6.06% to 5.97% on Wednesday, jumped as high as 6.05% on Thursday before falling back to close at 6.00%.
The stock market, however, was broadly higher again despite the backup in bonds. The Dow industrials surged 95.62 points, or 0.9%, to 11,066.42.
In another example of cross-currents in the economy, the Commerce Department reported a slowdown in the record-breaking housing industry. Construction spending in May fell 0.9%, the second straight monthly decline, mostly because of drops in residential and government spending.
Decreases were reported in single-family homes, apartment buildings, hotels and motels, and big government construction projects, it said. Higher mortgage rates were a major reason.
Of particular concern in the purchasing report were signs of inflation. The NAPM's index of prices paid for raw materials rose to its highest level since October 1997.
The rise in the price index likely stemmed from recent increases in oil costs and may not indicate inflation is accelerating, some analysts said. "This price index is just a commodity index, and commodity prices are a small percentage of total prices," said Greg Jones, chief economist at Briefing.com in Jackson, Wyo.
Wages and employee compensation typically make up about two-thirds of the final cost of goods, while prices of materials used to manufacture merchandise make up the rest.
The NAPM also said that its indexes of production, a gauge of current output, and of new orders rose to their highest levels since July 1997. The export index increased for the second month in a row.
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Manufacturing Index Grows
The purchasing managers' index track overall business activity of more than 300 industrial companies. A reading above 50% indicates the manufacturing economy is expanding.
Source: National Assn. of Purchasing Management