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NAPM says growth slows
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August 2, 1999: 4:30 p.m. ET
But inflation fears lurk as July factory activity expands for sixth month
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NEW YORK (CNNfn) - Activity at the nation's factories expanded for a sixth straight month in July, though at a slower pace than in June, in the latest sign of what could be a cooler third quarter for the steamy U.S. economy.
The National Association of Purchasing Management reported Monday its manufacturing activity index fell to 53.4 in July from 57 in June, far short of the 56.1 level expected by economists.
"We're seeing some moderation in the pace of manufacturing activity as the third quarter gets under way," said William Sullivan, a bond expert at Morgan Stanley Dean Witter.
While still above 50 -- the dividing line between expansion and contraction in the manufacturing economy -- the report showed that new orders and production are cooling off. Manufacturing makes up about 20 percent of U.S. economic output.
The NAPM index over the last 12 months
The report gave an early lift to the bond and stock markets, which read it as a sign that inflationary pressures could wane if the economy overall cools. The Dow industrials initially rose 80 points to 10,735, but the blue chip index ended the day on the negative side, slipping 9 points to 10,645. The 30-year Treasury bond fell 3/32 to 88-7/32, driving the yield to 6.11 percent.
The easing pace of U.S. manufacturing activity, said NAPM Chairman Norbert Ore, should ease fears that the Federal Reserve may need to raise interest rates much to keep the economy from overheating.
But economists said the NAPM's price index, which rose to 54.7 in July from 53.5 in June, may be a lurking worry. Fed Chairman Alan Greenspan has been adamant that inflation, with the economy in its eighth year of expansion, is enemy No. 1.
"Greenspan's comments have been so specific to the markets and costs," said Anthony Crescenzi, a bond analyst at Miller Tabak. "The price index was worse than the market would have liked."
The Fed's policy-making committee on June 30 raised its target on the overnight rate banks use to lend to each other by a quarter-point to 5 percent. Many economists say August data such as the NAPM report will play a role in determining whether the Fed strikes again when it next meets Aug. 24.
The NAPM report, derived from surveys of purchasing managers nationwide, said they are "cautiously optimistic" about economic conditions, but are concerned about rising interest rates, Asian stability and Europe's rebound, among other things.
Separately Monday, the Commerce Department said construction spending climbed 0.5 percent in June to a seasonally adjusted rate of $699.4 billion, in line with economists' forecasts after a downward-revised decline of 1.4 percent in May.
A recent climb in borrowing costs -- which has made mortgages less attractive -- has kept a lid on any rebound for the residential construction market.
"It shows that the upturn in interest rates is indeed beginning to exert an influence on this rate-sensitive sector of the economy," Sullivan said. 
-- from staff and wire reports
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