Reports Show U.S. Expansion on Track

Thu Jul 1, 2004
By Eric Burroughs

NEW YORK (Reuters) - U.S. manufacturing expanded briskly for a 13th straight month in June while construction spending cooled a bit in May, according to two reports showing the economy's robust expansion on track.

The Institute for Supply Management said its June survey of factory activity edged down to 61.1 from May's 62.8 level but still reflected hearty growth in the sector that makes up less than a fifth of the economy. A reading above 50 signals growth.

High readings in new orders, production and another solid month of hiring showed strong growth is helping manufacturers heal the wounds of the sharp downturn that led to roughly 3 million job losses.

"I would characterize this as very robust conditions for the manufacturing sector," said Robert Dekaser, chief economist at National City Corp. in Cleveland.

Markets showed little reaction to the economic news, with the S&P 500 sliding 0.4 percent while the benchmark 10-year Treasury yield edged up slightly to 4.61 percent, still near a two-month low.

In a hopeful sign for inflation, the prices index also eased down from its nearly 25-year peak hit two months earlier, falling to 81.0 in June from 86.0 a month earlier. In recent weeks both oil and gasoline prices have come down from their record peaks, though they remain relatively high.

That should provide some relief to Federal Reserve policymakers, who hiked official rates for the first time in four years on Wednesday, but also played down the jump in price pressures this year, saying they were mostly due to "transitory factors" like commodity prices.

Rising interest rates may be starting to take a bite out of the housing market and construction spending, which rose just 0.3 percent in May to a seasonally adjusted $988.53 billion annual rate, below forecasts for a 0.7 percent rise.


The Fed began tightening its loose monetary policy by taking its federal funds rate on overnight bank lending to 1.25 percent from a 46-year low of 1 percent, and said it planned to keep lifting rates at a "measured" pace, barring any further run-up in inflation.

Norbert Ore, head of the ISM manufacturing survey committee, said he expected price pressures to ease in the second-half of the year as factories have already adapted to most of the shock from higher energy costs.

"I think the major increases that needed to take place have been put in place and now we're seeing things start to behave more normally where supply and demand are in better balance and prices are more negotiable," he said.

The employment picture continued to brighten, with the ISM employment index slipping to 59.7 from a 31-year high in May of 61.9. Seventeen of 20 industry sectors hired workers during the month.

Later in the week the monthly non-farm payrolls report for June is expected to show more healthy hiring, with forecasts for a 250,000 rise compared with 248,000 the prior month.

A third report on Thursday showed first-time claims for jobless benefits edging up to 351,000 in the week ending June 19 from 350,000 the prior week -- a second consecutive increase. But the unexpected rise was dismissed as negligible.

The surprisingly small increase in construction spending was also downplayed, coming off a big 1.2 percent rise the prior month. Private residential construction remained solid in May, rising 0.8 percent. But commercial construction is still struggling to pull out of its sharp downturn during and after the recession, falling 0.4 percent during the month.

Residential construction has remained strong in recent months, as prospective homeowners have rushed to lock in relatively low rates and avoid paying more for home loans. New home sales hit a record pace in May.

Important questions remaining for the economy include whether consumer spending is beginning to slow in the second half of the year and whether such a slowdown will pull down overall growth.

Retailers have reported sluggish sales in the past few weeks. Earlier this week retailing behemoths Wal-Mart and Target warned of lower sales, while General Motors also said it was seeing a slowdown in spending.

Automakers report their June sales later in the day, and forecasters see a slip from the prior month. Domestic car sales are seen posting a 5.5 million annual pace, while truck sales are expected to slip to a 8.2 million annual pace.






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