Economy Keeps Fed Watchers Guessing
Reports on U.S. manufacturing and consumer spending painted a mixed picture of the U.S. economy Tuesday, keeping the jury out on whether the Federal Reserve will push interest rates higher later this month.
U.S. manufacturing expanded for the 18th consecutive month in July but at the same pace as the previous month, according to a report issued by the National Assn. of Purchasing Management.
In a separate report the Commerce Department said spending on construction projects slowed for the third straight month in June to its weakest pace in six months. Construction fell 1.7% after a revised 0.2% decline in May.
Although these reports seemed to back hopes that the world economy’s rip-roaring growth of late 1999 and first half of 2000 is moderating to a more sustainable pace, a separate Commerce Department report on consumer income and spending kept analysts guessing as to whether the Fed will tighten credit further.
The government said consumer spending grew at a faster pace than income rose in June, with spending up 0.5% to a seasonally adjusted annual rate of $6.737 trillion, after an upwardly revised gain of 0.3% in May.
Personal income, by contrast, rose 0.4% at an annual rate of $8.267 trillion in June, compared with a revised 0.3% in May.
Financial markets are split on whether the central bank has done enough to slow the economy, or whether more rate rises will be needed in the next few months. The Fed next meets on Aug. 22.
“It’s a close call,” State Street Corp. chief economist Fred Breimyer said.
NAPM’s manufacturing index--a closely watched barometer of that sector--registered 51.8 in July, the same reading as in June as imports, production and new orders moderated.
“It suggests growth is off the boil in the manufacturing sector and not contributing as much to growth as it was six months ago,” said Dana Johnson, head of research at Banc One Capital Markets.
But analysts at Credit Suisse First Boston noted the NAPM report had fallen out of sync with GDP growth during the 1997 Asian economic crisis and urged caution in drawing broad conclusions about broader economic growth based on the report.
NAPM’s measure on manufacturing activity--which accounts for around 20% of total U.S. economic activity--has been slowing since it peaked at 57.3 last September. Wall Street economists had expected a slight acceleration in the rate of growth to 52.2.
“The overall picture is one of slower growth in manufacturing activity during the month of July,” said Norbert Ore, chairman of the NAPM’s manufacturing business survey committee.
NAPM’s indexes on new orders, backlogs of orders and production all moderated slightly in July but manufacturing employment growth accelerated to 52.7 in July from 50.8 in the previous month.
While any reading above 50 indicates the industrial sector is still growing, the pace is now at similar levels to January 1999, the report showed.
The U.S. economy accelerated powerfully toward the end of 1999, growing at an annual rate of 8.3% in the final quarter of the year and registering annualized growth of 4.8% and 5.2% in the first and second quarters of this year.
