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Manufacturing still strong
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November 1, 1999: 2:48 p.m. ET
NAPM index rings in at 56.6 in October, just above forecasts; prices rise
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NEW YORK (CNNfn) - U.S. manufacturing output dipped slightly in October, still growing strongly to satisfy demand at home and abroad, a trade association reported Monday. At the same time, prices paid for materials rose, raising the specter of accelerating inflation and higher interest rates.
Separately, the Commerce Department said construction activity rose 0.5 percent in September, more than forecasts of a 0.2 percent decline.
The National Association of Purchasing Management said its index of manufacturing activity slipped to 56.6 in October from 57.8 in September, just slightly above expectations. A reading on the index above 50 indicates output is on the upswing. The "prices paid" component of the index -- a measure of costs -- rose to 69.4 from 67.6, its fourth consecutive monthly gain.
The report indicated to analysts and investors that demand for U.S. goods remains strong, particularly from overseas as economies in the Far East rebound. The overall index measures the number of orders, the amount of production and other activities among U.S. manufacturers.
"Despite the moderation in the overall index and in some of the more closely followed components, the overall tone of the report is that the manufacturing sector continues to grow at a solid rate," said Adam Blankman, a markets analyst at Standard & Poor's MMS in San Francisco.
Rising overseas demand
One sore spot among analysts and economists looking for the U.S. economy to decelerate from its torrid pace has been the robust activity this year at U.S. factories, which continue to churn out goods at a rapid clip.
Part of that activity reflects persistently strong consumer demand for things like cars, furniture and appliances -- a result of the 8-1/2 year economic expansion. The other part, recently, has been a rebound in demand for U.S. goods overseas, particularly from Asia where economies are just beginning to show signs of turning around from their 1997 slump.
"This report indicates manufacturing is continuing to rebound from the Asian crisis, which is exactly what the Fed expects," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. The report will have little influence on the Fed's decision later this month on whether to raise interest rates a third time, he said.
That means, if consumer demand at home slows and if demand abroad gains, the U.S. economy will not be growing at a pace that needs to be tempered with another rate rise, some analysts said.
Fed policy outlook
Indeed, investors are trying to get a grip on whether Fed policy makers will raise short-term rates at their Nov. 16 policy meeting or leave them steady, particularly since there is no evidence of accelerating inflation in the U.S. economy.
The Fed's current target for overnight loans between banks is 5.25 percent. It left the rate unchanged at its Oct. 5 meeting, though warned that it was leaning toward raising rates again if it thought inflation might be posing a threat.
Bonds, which posted strong gains last week, registered little reaction to Monday's reports
The overall NAPM index has been above the key 50 mark since the start of the year after dropping to 45.3, its lowest reading since 1991 when the economy was emerging from its last recession.
However, members of the NAPM board who help assemble the monthly data said the gains are partly a reflection of rising prices for oil and other commodities that manufacturers use to keep their assembly lines going. Oil prices have almost doubled this year, rising to almost $22 a barrel from around $11 a barrel at the start of the year.
Prepping for Y2K
That bodes well for any inflation concerns among market participants, Blankman said. Despite gains in oil prices and other commodities this year, inflation has remained tame. Consumer prices rose at a 2.6 percent annual rate in September.
And those higher costs aren't making their way into the price of finished goods, "at least not yet," said Sherry Cooper, chief economist at Nesbitt Burns Inc. in Toronto. "Overall, this report shows the U.S. economy is still growing strongly and that price pressures remain a threat."
The new orders index slid to 59.5 in October from 64.4 in September, while the inventories index jumped to 51.1 from 43.2, its first foray above the 50 mark in more than 10 years. NAPM attributed the gain to inventory building among producers in advance of Y2K and possible computer-related issues.
Export orders slowed last month as the NAPM index fell to 52.4 from 56.6. The production output index, meantime, which measures what manufacturers are pulling off the assembly line and putting onto skids, slipped to 58.3 from 61.7 in September. The employment index, which measures the number of jobs at the nation's factories, rose to 52.8 from 51.5.
Construction activity up
Construction activity posted a larger-than-expected 0.5 percent increase in September, led by a gain in public-sector construction projects, Commerce said.
Analysts surveyed by Reuters had anticipated activity slipped 0.2 percent in September. August's activity was revised downward to minus 0.8 percent after being initially reported as minus 0.4 percent.
Much of the gains were the result of higher spending on public construction, particularly roads and highways, the report said. Public construction spending rose 3.3 percent on the month.
That was offset by a 0.3 percent decline in private sector construction activity, suggesting higher borrowing costs have crimped private development, especially in residential construction. Residential spending declined 0.1 percent in September.
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