Factory Output Up, but Price Pressures Grow

As the U.S. economy rolled Tuesday into its longest expansion ever, a new report showed the factory sector grew for the 12th straight month but price pressures soared, fueling fears about higher inflation.

Coming a day before the Federal Reserve was expected to announce a modest interest rate hike to cool the economy, the National Assn. of Purchasing Management said that its index showed manufacturing activity in January continued to expand, though at a slower rate than in December.

At the same time, prices manufacturers paid for materials--a closely watched gauge of inflation--surged to the highest reading in nearly five years. The price index rose to 72.6 in January, up from 68.3 the prior month.

So far, manufacturers are still absorbing most of the rising input costs, said Norbert Ore, chairman of the NAPM survey committee. But this was growing increasingly difficult, he said.

“That is going to feed into the desire of the Fed to look into a series of rate hikes to tame inflation,” said Barry Hyman, market strategist at Ehrenkrantz, King Nussbaum Inc.

NAPM compiles its indexes by surveying 350 manufacturers. Any general index reading above 50 indicates an expanding sector.

Also Tuesday, the Commerce Department said that spending on new U.S. construction projects rose in December to a record $730 billion, a 2% gain fueled by record spending on new housing and public construction projects.

New-vehicle sales in January picked up where last year left off, with most auto makers reporting robust gains in U.S. sales despite East Coast snowstorms.

General Motors posted an 11.8% gain in sales, topping estimates, with truck sales up 17.9% and cars up 6.5%. Ford Motor’s sales grew 4.5%. A jump in car sales, including the imported Volvo and Jaguar lines, offset a decline in trucks.

DaimlerChrysler said sales of American brands slumped 5.9%, but said it faced a tough comparison with record high sales last year.

Toyota Motor’s sales surged 35.7%, and Honda Motor posted a 3.3% gain. Sales climbed 26.7% at Nissan Motor.

Total January industry sales, with all but BMW and Porsche reporting, were up 10%, equaling a monthly selling rate of 17.6 million units.

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Purchasing Managers Index

Tracks overall business activities of more than 300 industrial firms:

January: 56/3%

Source: National Assn of Purchasing Management.