US Manufacturing Revives
By Svea Herbst-Bayliss
NEW YORK (Reuters) - The U.S. economy, basking in its eighth year
of expansion, looks ready to keep growing at a brisk pace in 1999
as manufacturers Monday confirmed a turnaround in the long
sluggish sector.
But strong economic news sent new shivers through financial
markets, heightening fears first sparked by Federal Reserve
Chairman Alan Greenspan that official interest rates may soon
need to be raised.
''What this means in practical terms is that manufacturing, a
sector which has been particularly soft in 1998, is coming back
and adding to the already strong impetus that the economy has,''
said Anthony Karydakis, senior financial economist at First
Chicago Capital Markets.
Bond prices, which move in the opposite direction to yields,
fell, taking stock prices along with them in early afternoon
trading. The dollar, which benefits from a strong economy, rose
against Europe's euro.
After showing signs of improvement in January, the National
Association of Purchasing Management's index on manufacturing
activity surged to 52.4 in February from 49.5 in January and
ended several months of consecutive declines.
Norbert Ore, chairman of the group's business survey committee,
reinforced the optimistic outlook by saying, ''This certainly
signals a possible reversal of recent fortunes in the sector.'' A
reading above 50 signals economic expansion and a reading below
50 indicates a contraction.
At the same time the Commerce Department reported that Americans
had earned more and kept spending it in January.
Personal income rose by 0.6 percent in January after declining
0.1 percent in December and spending rose by 0.3 percent in
January, cooling from December's 0.7 percent gain.
Economists began to brace for more good economic news since
orders for big-ticket items like cars and furniture surged 3.9
percent in January, marking the fastest rate in more than a year.
Now many feel ready to revise growth outlooks to above 3 percent
for the first quarter, in part because the rebound in
manufacturing has added fuel to the economy's fire.
''Manufacturing indicates there won't be as much of a weakening
as some people had expected,'' said Chase Securities economist
Bill Sharp. ''But it also will not indicate that the economy will
rush to 5 percent growth from 4 percent growth because of
manufacturing,'' he added.
In the bond market the benchmark 30-year Treasury bond fell to
its session low of 93-25/32 after manufacturing data was released
and yields remained at their highest levels since August.
Rising bond yields hurt stock prices and the Dow Jones industrial
average briefly traded nearly 10 points lower in early afternoon
before turning higher. Last week the stock market had already
given up some recent gains as analysts feared the market was
overvalued.
''For the Federal Reserve, the manufacturing data is going to
frustrate their expectation that the economy is slowing and it
will complicate matters,'' Karydakis predicted.
To traders, the news translated into higher interest rates
whether they be raised by the central bank or indirectly by
markets, and it refocused attention on this week's U.S.
employment report to give new clues on how strong the economy is.
While the economy may be performing just a touch too well, some
economists still insist the central bank has more time to mull
its next move after cutting rates three times late last year.
''In the longer term, I think the markets are over reacting as
the economy can still operate above its potential without
generating new inflationary pressures,'' Sharp concluded.
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