Manufacturing Sector Posts Strong Growth
The nation’s manufacturing sector shook off the effects of Hurricane Katrina and expanded robustly during September, but prices for raw materials surged, raising the specter of higher inflation, according to a report released Monday.
Also, the Commerce Department reported that construction spending climbed to a record high in August, helped by a renewed boom in housing. Even bigger gains are expected in coming months, spurred by the massive rebuilding required in the wake of Katrina and Hurricane Rita.
The Institute for Supply Management said Monday that its manufacturing index advanced to 59.4 in September from 53.6 the month before, for the industrial sector’s 28th consecutive month of growth. It was the highest reading since the gauge hit 59.6 in August 2004 and well above the 54 reading that analysts had expected.
A reading above 50 indicates the sector is expanding; below 50 indicates manufacturing activity is shrinking.
Although the report overall was positive, manufacturers reported another sharp jump in prices they paid last month as higher crude oil costs and transportation bottlenecks caused by the hurricanes boosted expenses for energy and for materials. The institute’s price index rose to 78 in September from 62.5 in August. The index had jumped 14 points the month before.
Norbert J. Ore, chairman of the institute’s business survey committee, said the September report was heavily influenced by Katrina, which struck the Gulf Coast on Aug. 29. He said, for example, that a good part of the rise in new orders appeared to be manufacturers scrambling for alternate suppliers after regular sources were shut down by the storm.
This, he said, was “event-driven demand” as opposed to improved order books amid a strengthening business cycle.
Ore also said the surge in prices appeared tied to Katrina and its aftermath.
“When manufacturers are forced to go to that second or third supplier, they’re off contract,” he said, meaning that companies may have to pay a premium for needed raw materials.
It remained unclear how much of those higher costs manufacturers could pass on to other business customers and to consumers.
Mark Vitner, senior economist with Wachovia Securities in Charlotte, N.C., said that with consumer demand softening, “it’s more likely corporate profits are going to come under pressure rather than [consumer] prices.”
Still, Vitner expects the Federal Reserve to continue raising interest rates at its November and December meetings.
“Hurricane relief is pumping billions of dollars into the system, meaning fiscal policy is more stimulative,” Vitner said. “If monetary policy were to remain accommodative that’s a recipe for inflation in 2006, and the Fed doesn’t want that to happen.”
As for the construction sector, the Commerce Department said total August construction spending rose by 0.4%, the biggest increase in three months. It pushed building activity to an all-time high of $1.11 trillion at a seasonally adjusted annual rate.
The increase did not include any hurricane-related activity, but the government said all the spending on the rebuilding of homes and businesses in coming months will add to the construction figures.
