Inflation tame, factory orders up
Economic data released Friday showed inflation under control in July while U.S. factories were busier than forecast, portraying a resilient economy in little need of an interest rate cut.
A core inflation index from the Commerce Department rose 0.1% in July, holding the year-on-year increase in the Federal Reserve’s favorite inflation gauge to 1.9% for a second month.
Analysts polled by Reuters were expecting the core PCE price index, which excludes often-volatile food and fuel costs, to gain 0.2% after a June rise of 0.2% that was originally reported at 0.1%.
Although analysts said the benign inflation data would provide some latitude for the Fed to cut the federal funds rate to forestall a credit crunch, the other data suggested that the economy might not need such stimulus.
Fed Chairman Ben S. Bernanke “continues to emphasize that, away from housing, the economy continues to expand at a moderate pace,” said Thomas Sowanick, chief investment officer at Clearbrook Financial in Princeton, N.J.
On a more worrisome note, a Reuters/University of Michigan consumer sentiment index fell to the lowest level in 12 months as households grew uncertain about economic prospects because of high food and fuel prices and recent financial market turmoil.
The Commerce Department said personal income rose a bigger-than-expected 0.5% in July, the largest month-on-month gain since a 0.8% rise in March.
Overall prices, as measured by the government’s personal consumption expenditures index, also rose 0.1% in July after an upwardly revised 0.2% gain in June.
July’s 1.9% rise in the core PCE index, the Federal Reserve’s favorite inflation gauge, was the lowest reading since a 1.9% rise in March 2004 and was within the Fed’s normal “comfort range” of between 1% and 2%.
Robert MacIntosh, chief economist of Eaton Vance Management in Boston, said the spending and income growth signaled a resilient economy that might not need a rate cut.
“The consumer is still alive and well and inflation is in good shape,” he said.
New orders at U.S. factories jumped by a much bigger-than-expected 3.7% in July and a strong 2.4% without the volatile transportation component, the Commerce Department said.
Analysts polled by Reuters expected orders to rise 0.8% in July after an upwardly revised 1.0% gain in June, originally reported as a 0.6% rise.
July non-defense capital goods orders excluding aircraft, viewed as a proxy for business spending, rose 1.7%, slightly less than the 2.2% July gain reported Aug. 24, the Commerce Department said.
Transportation equipment orders, a volatile category whose monthly performance is heavily influenced by commercial aircraft orders, rose 11%. Excluding transportation, orders rose 2.4% in July after a revised 0.4% fall in June.
