Economic Data Back Forecasts of Rate Hike

U.S. economic data released Thursday supported the view that the Federal Reserve would keep raising interest rates to curb inflationary pressures, but Chairman Ben S. Bernanke said the effect of higher energy costs on other prices has been limited.

The Philadelphia Federal Reserve Bank said the pace of business expansion in the region slowed and prices paid by manufacturers also dipped. But its index of new orders jumped sharply this month from May’s level.

Also Thursday, the New York Fed said activity among New York manufacturers and prices they paid showed a surprising jump in June, while a Labor Department report showed initial claims for unemployment benefits dropped last week to the lowest in nearly four months, a sign of resilience in hiring.

The reports overshadowed data from the Federal Reserve showing an unexpected decline in U.S. industrial output for May and cemented expectations that the Fed will raise rates again by a quarter of a percentage point when it meets this month.

“It looks like manufacturing is hanging in there,” said Christopher Rupkey, economist at Bank Tokyo-Mitsubishi UJF in New York. “

On balance, analysts said, the data gave the Fed more reason to tighten credit further.

Bernanke, speaking to the Economic Club of Chicago, did not directly address the issue of interest rates. But he sounded less hawkish about inflation than he has recently, saying the limited economic fallout from higher energy prices reflected the Fed’s success at keeping expectations of future inflation low.

He said that despite recent upward pressure on inflation, peoples’ expectations of future inflation “have remained within the ranges in which they have fluctuated in recent years.

“When inflation expectations are anchored ... the monetary response can be more limited,” Bernanke said.

The Fed chief also lauded the economy’s performance in the face of higher energy costs. “The U.S. economy is remarkably flexible, and it seems to have absorbed the cost shocks of the past few years with only a few dislocations,” he said.

The Philadelphia Fed said its business activity index eased to 13.1 in June from 14.4 in May. But the reading was above Wall Street analysts’ forecast of 11.3.

Any reading above zero indicates growth in the region’s manufacturing sector.

A measure of prices paid by manufacturers fell to 48.7 in June from 55.3 in May, while the new orders index, a gauge of future growth, rose to 17.7 in June from 2.7 in May.

Manufacturing activity in New York state factories jumped in June to the highest level since March, the New York Fed said. Its index of general factory conditions rose to 29.01 from a revised 12.94 in May.

Separately, the Labor Department said new claims for state unemployment insurance benefits fell to a seasonally adjusted 295,000 last week from an upwardly revised 303,000 the previous week. The four-week moving average of claims fell to 315,750 from 328,000 the previous week.

Another Fed report showed that output at U.S. factories, mines and utilities slipped 0.1% in May, in part because of a fall in motor vehicle production.

In another report, the government said net flows of foreign capital into U.S. assets fell sharply in April to their lowest reading since March 2005. Inflows were $46.7 billion in April. Analysts had forecast $67.5 billion.