NEW YORK (CNNfn) - Manufacturing activity jumped much higher than expected in September, according to the nation's purchasing managers, who said they were paying significantly more for materials, raising new inflation fears.
Both stock and bond markets moved sharply lower Friday on the bellwether report of the National Association of Purchasing Management, along with a separate report that personal spending and income were much stronger than expected in August. Consumer spending accounts for two-thirds of the U.S. economy.
The reports raised concerns about future interest rates, with Federal Reserve policy makers meeting next week.
But some of the strong manufacturing numbers released by NAPM may be attributed to companies starting to increase inventory as protection against potential Year 2000 computer problems early next year, said Rosanne Cahn, economist at Credit Suisse First Boston. She believes that Y2K-inspired ordering may pick up even more steam in the fourth quarter, driving numbers higher than they would be otherwise.
"The Fed has some awareness of the fact there's a flurry of Y2K ordering going on," said Cahn.
Andrew Hoge, economist at the economic consulting firm WEFA, said he thinks September was too early to see Y2K inventory building except in orders. But he also believes the Fed will leave rates unchanged at the meeting next week.
"I think watching the prices paid in the NAPM is a little silly, but bond traders trade on whatever they want," he said.
Other economists also said investors shouldn't overreact to the reports, given the expectations of strong profit reports for the just-completed quarter.
"It's reasonable for investors to be concerned with inflation, given six months ago we were talking about deflation," James Glassman, senior economist at Chase Securities, told CNNfn. "What we're seeing is the purchasing managers are telling us that the costs of some materials are going up. The question is, can it be passed on to consumers?"
Glassman also said that it's important to see in these numbers that manufacturing, a sector that has lagged the strong growth of the overall economy, is having its own recovery.
The National Association of Purchasing Management's index rose to 57.8 in September from 54.2 in August, well above the 54.3 reading that economists surveyed by Reuters had been expecting.
A reading above 50 indicates growth in the nation's manufacturing economy, while below 50 suggests contraction. September marks the eighth straight month of growth.
The index's price component, a measure of inflationary pressures in the sector, was 67.6 in the month, 7.8 points above the 59.8 level in August. Of managers surveyed, 42 percent saw higher prices of materials during the month and only 6 percent saw decreased prices. The component is up 12.9 points over the past two months.
The new orders index was particularly strong, rising to 64.4 from 56.6 in August, with 39 percent of the managers survey reporting stronger new orders than in August, and only 9 percent reporting a decline.
"The overall picture is one of continuing growth in manufacturing activity during the month of September," said Norbert Ore, chair of NAPM's survey committee. "Production and new orders gained momentum and coupled with the continuing strength in new export orders paint a picture of a vigorous manufacturing economy during the third quarter. We see continued strengthening in prices with pricing power apparent in a broad base of commodities."
Commerce reported that personal income rose 0.5 percent, while spending jumped 0.9 percent to an annual rate of $6.25 trillion.
But the department also reported that construction spending unexpectedly fell 0.4 percent in the August to a seasonally adjusted annual rate of $692 billion, as a 1.1 percent drop in private sector building overcame a 2.2 percent gain in spending on government projects.
The construction sector, one of the economy's strongest recently, also was off 0.6 percent in July and many analysts were expecting a gain in August.