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Manufacturing Grows, But Prices Climb, Too

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Bloomberg News

Published: July 2, 2008

U.S. manufacturing grew in June and a measure of prices jumped to a 29-year high, underscoring the Federal Reserve's concern that economic growth will be accompanied by faster inflation.

The Institute for Supply Management's factory index rose to 50.2, more than forecast, from 49.6 in May. It was the first reading above 50, the dividing line between expansion and contraction, since January. A gauge of prices paid climbed to 91.5 from 87.

"While it may be too soon to say that manufacturing has begun to start growing again, it is possible that a bottom is being reached," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa. At the same time, "Fed members may not be as happy with the costs index moving into the stratosphere."

Stocks and the dollar pared their losses after the report, which indicates that federal tax rebates are helping companies weather the housing slump. Economists at Morgan Stanley raised their estimate for second-quarter economic growth to 1.8 percent from 1.6 percent after a separate report Tuesday showed construction spending fell less than anticipated.

Figures from the Commerce Department on Tuesday showed construction spending fell 0.4 percent in May, less than forecast, as work on hotels, power plants and hospitals helped cushion the slowdown in homebuilding. Private residential projects fell 1.6 percent, the 25th drop in the past 26 months.

Economists forecast the manufacturing index would decrease to 48.5 from 49.6 in May, according to the median of 78 projections in a Bloomberg News survey.

"The U.S. manufacturing sector is split between the haves and have-nots, with autos in the have-nots, building materials in the have-nots, exports in the haves," Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, said.

Auto-industry figures are forecast to show purchases of cars and light trucks fell to a 14 million annual rate in June, a 13-year low.

A shrinking trade deficit has helped some companies withstand slower U.S. sales. The ISM's export measure cooled to 58.5, from 59.5 in May, which was the highest in four years.

General Electric Co., the world's biggest maker of locomotives and power-plant turbines, said last month that sales of such equipment may rise 15 percent to 20 percent this year as Asia's emerging nations increase investment in infrastructure.

The Institute's index of prices paid jumped to the highest level since July 1979. Economists surveyed by Bloomberg News forecast the gauge would be unchanged from 87 in May.

"It's a very inflationary environment as far as manufacturers are concerned." Norbert Ore, chairman of the institute's manufacturing survey, said.

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