Reports Indicate Economy’s Pace May Be Slowing

The evidence mounted Thursday that the economy is finally slowing. A fresh batch of statistics pointed to pullbacks in construction and manufacturing and suggested that even consumers are pausing to catch their breath.

Retail sales at major store chains grew less than expected in May, sales of cars and trucks weakened, growth in manufacturing slipped to a 15-month low, and construction spending fell slightly.

The latest data don’t signal a serious downturn, but taken together they indicate that the six interest rate increases in less than a year by the Federal Reserve are having their intended effect of cooling the red-hot economy.

That was Wall Street’s interpretation, as bond yields tumbled again and stock prices surged on hopes the Fed might be nearing the end of its series of rate hikes.

“The evidence is piling up that the brakes are on the pace of growth,” said Gordon Richards, economist at the National Assn. of Manufacturers.

In one of the first major readings of the last month, an industry group said growth of the U.S. manufacturing economy slowed considerably in May. The survey by the National Assn. of Purchasing Managers also reported fewer price increases for raw materials. An executive of the group said it appears that such inflationary pressures peaked in March.

The purchasing agents group reported that its overall index of economic activity in the manufacturing economy fell 1.7 points to 53.2 in May, the lowest reading since February 1999. Any reading above 50 indicates growth.

But economists said there was still reason to fear a surge in inflation, as oil prices once more are on the rise and as companies are pressured to raise wages to attract workers in a tight labor market.

The monthly report on employment and hourly wages, scheduled for release today by the Labor Department, should provide clues on the labor market, where the unemployment rate last month fell to a 30-year low of 3.9%.

The government said Thursday that the number of Americans filing new claims for unemployment benefits rose a modest 1,000 last week to 286,000. Economists view anything below 300,000 as a sign that employers will have trouble filling jobs.

In another government report from Washington, spending on construction projects, a sector sensitive to interest rates, fell 0.6% in April, the Commerce Department said. It was the biggest setback in almost a year.

Elsewhere, a survey of 68 retailers by the Bank of Tokyo-Mitsubishi Ltd. showed that U.S. retail sales rose 4.6% in May, below the average pace of the first four months of the year. Retail sales are vulnerable to higher interest rates.

But May’s sales probably reflect the cool, wet weather that kept many consumers at home more than any economic weakness, Bank of Tokyo economist Mike Niemira said.

Taken together, the reports were consistent in pointing to modestly slower growth. Earlier in the week, economists reported falling home sales and slippage in an index of leading economic indicators.

But economists said this won’t necessarily change the Fed’s stance on interest rates. Fed policymakers next meet June 27-28, then again for an Aug. 22 session.

Worried that inflation would reemerge as a result of the economy’s rapid growth, the Fed began tapping on the brakes last June. It raised short-term interest rates one-quarter of a percentage point five times. Last month it became more aggressive, going with a half-point increase.

“You have some tentative evidence of slowdown, but unemployment is so low, and the Fed wants to be very sure they have their slowdown in hand before they back off,” said Maury N. Harris, chief economist at PaineWebber Group Inc. in New York.

However, Mark Vitner, an economist at First Union Corp. in Charlotte, N.C., said, “The news that the economy is cooling off a little bit may make it a little easier for them to hold off raising rates in June, and I think that’s what they would like to do.”

But economists appeared optimistic the slowing is likely to lead to a healthier economy, rather than a recession.

“I think we are going to head for a soft landing,” Harris said. “The hard landings or recessions . . . usually come after you have exceptional high inflation.”

* CLOTHING RETAILERS’ WOES

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