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NAPM index gains in May
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June 1, 1999: 2:35 p.m. ET
U.S. manufacturing, prices paid data spark worries of accelerating inflation
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NEW YORK (CNNfn) - Manufacturing output rose for a fourth month in a row in May while prices at factories surged, suggesting the U.S. economy is growing at a quick enough pace to spark an increase in short-term lending rates, according to a report issued Tuesday.
The National Association of Purchasing Management (NAPM) said its monthly index measuring manufacturing output rose to 55.2 in May, topping the 53.4 consensus of analysts surveyed by Reuters and the 52.8 reported in April. A reading above 50 typically indicates U.S. manufacturing activity is expanding.
Its index of prices manufacturers pay for everything from petroleum to computer chips rose to 52.2 in May from 49.9 during April. Both indexes rang in at their highest since October 1997.
The report raised concern among analysts and investors that the U.S. economy is expanding too quickly, and might force the Federal Reserve to raise short-term lending rates in a bid to ward off inflation.
"This is worse than we expected," said A.C. Moore, chief investment strategist at Dunvegan Associates. "The inflation watch is key for financial market performance currently. This is not a helpful number."
Other reports overshadowed
Both stocks and bonds plunged following the report, which overshadowed two simultaneously released economic reports showing a steeper-than-expected decline in April construction spending and the first decline in leading economic indicators since last June.
The Commerce Department said construction spending fell 2.4 percent in April, the biggest drop in more than five years and far steeper than the 0.1 percent decline that was the consensus of analysts surveyed by Reuters. The March figure was revised to up 1.3 percent from the originally reported 0.5 percent increase.
Leading economic indicators fell 0.1 percent in April, the Conference Board reported; the Reuters consensus of analysts called for the index to be unchanged. The March figure was revised to unchanged from the originally reported 0.1 percent increase.
The Dow Jones industrial average slid more than 100 points within minutes of the three reports, while the 30-year benchmark bond fell 1-1/4 points, sending its yield up 9 basis points to 5.92 percent.
"The likelihood of inflationary pressures is increasing," said Barry Hyman, market strategist at Ehrenkrantz, King & Nussbaum. "The likelihood that the (Federal Reserve) is going to do something is increasing."
Eyes like a hawk
At its meeting last month, the Fed's policy-making body publicly announced that if it was inclined to move official short-term interest rates in any direction, it would be up. The current target for short-term rates is 4.75 percent. That target, called the fed-funds rate, sets the trend for consumer and business loans.
Since that announcement, financial markets have been looking for evidence that the economy is slowing on its own and doesn't need the Fed to apply the brakes with a rate increase. Higher rates make borrowing more expensive, discouraging consumers from spending. It works the same way for companies.
In the past two weeks, investors have seen some of that evidence. Growth, rather than slowing as many analysts had forecast, appears to be gaining momentum as demand rises, both within the U.S. and beyond its borders. That, some analysts say, is poised to finally spark an increase in consumer prices.
NAPM Chairman Norbert Ore cautioned not to read too much into the stronger-than-anticipated numbers. "One month does not make a trend," he said in a conference call. "Though we've seen a reversal in the rate of decline, we're really not seeing a trend of increased prices."
Fed Gov. William McDonough, however, didn't necessarily agree. Speaking on the future outlook of U.S. monetary policy, McDonough said, "we (the Fed) will do what we have to do to maintain price stability."
-- from staff and wire reports
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