Midwest biz slams on brakes
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Mortgage applications slide on higher rates
June 30, 2004
(Reuters) — Business in the Midwest expanded at a slower pace in June, hit by an auto sales slowdown, a report showed Wednesday, lending support to views the Federal Reserve need raise interest rates only gradually to curtail inflation.
A separate report said mortgage applications also declined in the latest week, reflecting already-higher interest rates ahead of the Federal Reserve's long-expected quarter-point hike in benchmark rates Wednesday afternoon.
The unexpectedly severe drop in the Chicago purchasing managers' index to an eight-month low echoed monthly declines in durable goods orders in April and May.
Economists said the day's reports backed up the Fed's decision to change rates gradually.
``If we're beginning to see some moderation in activity, then it's more likely that the Fed will move rates up at a modest, or measured, pace,'' said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.
Ten-year Treasury yields slipped to 4.60 percent from 4.68 percent on Tuesday and hit a one-month low.
The National Association of Purchasing Management-Chicago business barometer slid to 56.4 from May's 16-year high of 68.0, and was at its lowest since October. Economists had forecast the index at 65.0. A reading above 50 indicates expansion.
The Chicago survey is often seen as a litmus test for factory production, although both manufacturing and service industries are surveyed.
The Midwest region builds about 40 percent of U.S. motor vehicles and is a major producer of steel and farm equipment. Of the 10 largest U.S. counties, Cook County, which includes Chicago and nearby suburbs, ranks second in terms of manufacturing jobs.
``Motor vehicle sales are slowing and I think that this probably contributed to the sharp drop in production that we saw in June,'' said Mark Vitner, economist at Wachovia Securities in Charlotte, North Carolina.
General Motors Corp. said this week that light vehicle sales will total a seasonally adjusted annual rate of 16.3 million in June, down from 16.5 million a year ago.
Outside of the auto sector, major retail chains such as Wal-Mart Stores Inc. and Target Corp. have warned recently of weaker-than-expected June sales.
In the Chicago report, the production and new orders components fell heavily, although the employment measure showed a third straight month of growth. The prices paid component jumped to its highest since August 1988, a sign of inflationary pressures starting to dog the economy.
``What bothers me most is the drop-off in production and new orders. Durable orders have been dropping. The purchasing managers may be finally figuring out what's going on,'' said David Wyss, chief economist at Standard & Poor's Rating Services in New York.
The housing industry, an economic bulwark through both decline and recovery, is on what some see as its final fling before higher interest rates force a slowdown.
The Mortgage Bankers Association said its seasonally adjusted market index, a measure of mortgage applications, fell 4.4 percent in the week ended June 25 after rising for two straight weeks.
The purchase index, a gauge of new loan requests for home purchases, fell 4.2 percent but was still at an historically high level.
Widespread publicity about pending interest rate increases has encouraged would-be buyers to jump into the market. If the Fed continues to raise rates, even at a measured pace, the sizzling housing sector should weaken.
``We will probably look for another quarter percentage point increase in August unless price increases accelerate or economic growth slows,'' said Lynn Reaser, chief economist, Banc of America Capital Management, in St. Louis.
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