U.S. Economy: Manufacturing Grows, Prices Climb (Update1)

By Courtney Schlisserman


July 1 (Bloomberg) -- 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 Inc. in Holland, Pennsylvania. 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 today showed construction spending fell less than anticipated.

Yields on benchmark 10-year notes rose to 3.99 percent at 4:27 p.m. in New York, from 3.97 percent late yesterday and as low as 3.89 percent earlier today. The Standard & Poor's 500 Stock Index increased 0.4 percent to close at 1284.91.

Construction Spending

Figures from the Commerce Department today showed construction spending fell 0.4 percent in May, less than forecast, as work on hotels, power plants and public 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 in an interview with Bloomberg Radio.

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

Fewer Trucks

General Motors Corp. announced plans on June 23 to reduce North American truck production by 170,000 vehicles after U.S. sales fell. The company is heading toward its ninth straight annual U.S. sales decline and has had three consecutive yearly losses.

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.

Demand ``will be significant for decades,'' Vice Chairman John Rice, who runs the GE Infrastructure unit, told reporters on June 23 outside Kuala Lumpur, the Malaysian capital. Growth in Asia will be at the top end of that forecast, he said.

Sales Overseas

GE Infrastructure, the largest of six main businesses at the Fairfield, Connecticut-based company, expects overseas sales to account for 60 percent of total revenue this year, a five percentage-point increase from 2007.

The purchasing managers' gauge of new orders for factories decreased to 49.6 from 49.7. The production measure rose to 51.5 from 51.2.

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 on a conference call with reporters.

A gauge of supplier deliveries rose to 55.1, from 53.7 in May. The inventory index improved to 51.2 from 48 and the group's measure of order backlogs climbed to 47.5 from 46.

Tax Rebates

The $78.3 billion in tax-rebate checks sent by the government through June 27 has given Americans the means to overcome the jump in fuel costs for now. Consumer spending, which accounts for more than two-thirds of the economy, rose 0.8 percent in May, the most since November, the Commerce Department said on June 27.

The rebate-induced boost to spending will be short- lived, according to economists such as RBS Greenwich Capital's Stephen Stanley. After almost all of the tax rebates are sent out by mid July, consumers will still be confronting job losses and higher food and energy costs.

The U.S. has lost 324,000 jobs in the first five months of 2008. Economists anticipate a Labor Department report on July 3 will show payrolls dropped again last month.

The institute's employment index decreased to 43.7 from 45.5 in May.

Crude Oil

Manufacturers also are being hurt by rising prices. Crude oil rose to a record over $143 a barrel yesterday, completing the biggest quarterly increase in nine years. Prices have climbed 47 percent this year.

While spending has held up so far, the outlook has dimmed as gasoline prices soar and confidence plummets. Sales of expensive items, like automobiles, have been hardest hit as Americans try to stretch their paychecks.

Even with challenges, manufacturing is not contracting as much as in previous recessions. While the Institute for Supply Management's manufacturing index fell to a five-year low of 48.3 in February, it was still well above the 42.1 reading reached in February 2001, a month before the start of the 2001 recession.