U.S. June NAPM Index at 2-Year High, Showing
Manufacturing Is Accelerating
By Vince Golle
U.S. Economy: NAPM Factory Index Highest in 2 Years (Update1)
(Adds FOMC minutes in 7th paragraph and latest markets in
9th and 14th paragraphs.)
Washington, July 1 (Bloomberg) -- An index of U.S.
manufacturing accelerated in June to its highest level in two
years and more factories reported paying higher prices for
materials, a survey of corporate executives showed.
The National Association of Purchasing Management said its
factory index rose last month to 57, its highest level since July
1997, from 55.2 during May. Index readings above 50 mean most
manufacturers surveyed reported improved business.
''Manufacturing is rebounding because the red-hot economy is
being fueled by consumer spending,'' said Sung Won Sohn, chief
economist at Wells Fargo & Co. in Minneapolis. ''And some of this
is also coming from demand overseas.''
That could pose a dilemma for Federal Reserve policy-makers,
who suggested yesterday a single quarter-point increase to 5
percent in the overnight bank lending rate might be enough for
now to slow the economy and keep inflation in check. Instead,
today's report showed that the NAPM's index of prices paid for
raw materials rose to its highest level since October 1997.
''This points up the risks that the Fed faces if the economy
does not slow from its current breakneck pace,'' said Joel
Naroff, president and chief economist of Naroff Economic Advisors
Inc. in Holland, Pennsylvania.
Another report today showed the number of first-time jobless
claims filed last week fell 5,000 to 299,000. That Labor
Department finding suggests the pace of job creation is picking
up and workers are having little trouble finding employment.
At their May 18 meeting, Fed policy-makers expressed concern
that falling unemployment would put pressure on employers to
increase wages, minutes of the meeting showed. ''In particular,
if that pressure intensified, at some point further gains in
productivity would not be able to offset rising wage increases,''
minutes of the meeting showed.
Still, in a sign of slowing in the record-breaking housing
industry, the Commerce Department said construction spending in
May fell 0.9 percent after declining 1 percent a month earlier,
mostly because of drops in residential and government spending.
Bonds Fall
The benchmark 30-year Treasury bond slumped after the NAPM
report, erasing most of the gains from yesterday after the Fed
statement was released. The 30-year bond fell 3/4 of a point,
pushing up the yield almost 6 basis points to 6.03 percent. The
Dow Jones Industrial Average rose 34 points, or 0.3 percent.
''If we see consistent signs of inflation, that would be
important in terms of painting the picture for the Fed's next
meeting'' on Aug. 24, said Richard Yamarone, a senior economist
at Argus Research Corp. in New York.
The rise in the NAPM prices paid index probably stemmed from
recent increases in oil costs and may not indicate inflation is
accelerating, some analysts said. ''This price index is just a
commodity index, and commodity prices are a small percentage of
total prices,'' said Greg Jones, chief economist at Briefing.com
in Jackson, Wyoming.
Higher Oil Prices
Wages and employee compensation typically make up about two-
thirds of the final cost of goods, while the prices of materials
used to manufacture merchandise make up the rest.
Crude oil rose to an 18-month high today on futures markets
on expectations that the Organization of Petroleum Exporting
Countries is nearing quotas adopted in March to end a world glut.
Last month, OPEC moved closer to cutting supply by 1.7 million
barrels a day. The group in May made 91 percent of its cuts,
according to Bloomberg estimates.
August crude oil futures on the New York Mercantile Exchange
rose 7 cents to $19.36 a barrel in afternoon trading.
The NAPM report also showed its indexes of production, a
gauge of current output, and of new orders rose to their highest
levels since July 1997, and the export index increased for the
second month in a row. The employment index, a gauge of hiring
plans and labor market conditions, fell in June.
The NAPM index bottomed out at 45.3 last December,
reflecting a decline in U.S. exports. That was the lowest reading
since May 1991 when the economy was emerging from the last
recession.
On the Rebound
Rising U.S. consumer demand and rebounding foreign economies
are helping in manufacturing's turnaround. ''Manufacturing
activity continues to improve in most areas from the sluggish
conditions of the past year and half,'' the Federal Reserve said
in its latest report on regional economic activity.
''Production of such items as electronics, machinery, heavy
trucks and construction equipment has been especially strong,''
the Fed said.
During the first three months of the year, consumer spending
rose at the fastest pace in 11 years, reflecting demand for
everything from autos to computers and homes.
Automakers announced plans this month to invest more than $1
billion to build or expand U.S. factories in an effort to meet
rising U.S. demand for pickup trucks and sport-utility vehicles.
General Motors Corp. and Ford Motor Co. are adding capacity as
well to meet demand for light trucks.
Rising consumer confidence and discounts by GM probably
lifted U.S. car and light truck sales 4 percent in June, analysts
forecast. Almost every automaker has a new vehicle that is sold
out on dealer lots, driving average dealer inventory down to 53
days' supply at the end of May, compared with 64 days' supply a
year earlier, said Paul Taylor, chief economist at the National
Automobile Dealers Association.
Housing Demand
Coming off a record year, housing demand is staying strong
and that's bolstered orders at construction materials
manufacturers such as Wickes Inc. The Vernon Hills, Illinois-
maker of roof trusses, wall panels and floor systems said orders
for these products rose 23 percent in May compared with the same
month a year ago.
They'll stay busy, too. The order backlog at Wickes as of
May 29 was $11.1 million, an 85 percent increase over the same
period last year. Strong U.S. demand for industrial equipment has
been a shot in the arm for other manufacturers.
Cascade Corp. reported last month that its earnings in its
fiscal first quarter ended April 30 increased 35 percent compared
with the prior three months as demand in the U.S. stayed strong
and orders from overseas picked up.
''It now appears that some Asian markets are beginning to
rebound,'' said Robert Warren, president and chief executive
officer of the leading international manufacturer of lift truck
attachments.
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