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U.S. Industrial Output Surges During October : Economy: Purchasing managers report is better than had been expected. Stocks and bonds take a hit.

November 02, 1994|From Times Staff and Wire Reports

The U.S. manufacturing sector and overall economy surged during October, a widely followed survey showed Tuesday, sparking renewed inflation fears that fueled a broad decline in stocks and a sharp increase in long-term bond interest rates.

The Dow Jones industrial average fell 44.75 points and the 30-year Treasury bond yield surged to 8.06% from Monday's 7.97% following the release of the National Assn. of Purchasing Management report saying that U.S. manufacturing expanded in October for the 14th consecutive month, to the best level in nearly seven years. But prices also rose, bottlenecks grew and shortages surfaced for supplies ranging from wood chips to truck axles, the report says.

The monthly appraisal of American industrial health was stronger than many economists had anticipated.

It reinforced their view that the Federal Reserve Board will raise interest rates later this month for the sixth time this year, in order to slow the economy's growth by making borrowing costs more expensive.

"We thought the report would show little change and might drift back down," said Michael Moran, chief economist for Daiwa Securities America Inc. in New York. "I think it's signaling that the manufacturing sector is expanding from what already was a brisk rate."

The report, based on a survey of purchasing executives at more than 300 companies nationwide, is among the most widely followed non-governmental assessments of the economy because it offers some of the freshest evidence on how manufacturers are faring.

An index based on survey results rose to 59.7% in October from 58.2% the previous month. It was the highest level in the index since a 61.0% reading in December, 1987.

When the index exceeds 50%, it indicates a manufacturing expansion. Conversely, when the index falls below 50%, it indicates a manufacturing slowdown. This was the 14th straight month the index has exceeded 50%.

Ralph Kauffman, chairman of the purchasing group's business survey committee, said the October report reflects high demand for a wide range of products from the nation's factories.

The production component of the survey showed the strongest performance since December, 1987, with surging output of leather, apparel, paper, transportation equipment, furniture, plastics, rubber and glass.

But Kauffman also acknowledged some troubling elements in the report. Seventy percent of purchasing managers surveyed reported paying higher prices in October, matching a level last seen in April, 1988. For the second straight month, 19 of 20 industries reported higher prices in October.

In a further vexing sign of inflation, the number of managers reporting slower supply deliveries rose for the 15th straight month. The resulting bottlenecks could force prices up if factories must scramble to urgently procure supplies.

But Kauffman, who is procurement manager at Oryx Energy Co., said, "Our members are saying they're having a hard time passing through the price increases" to customers.

"There's a lot of competition on the sales end of their business," he said, noting that modest increases in the government's producer price index are evidence that manufacturers are absorbing higher costs.

In another, more dated, sign of economic strength, the Commerce Department reported that construction spending surged 1.6% in September, the biggest gain in six months, as private building staged a sharp turnaround. The report suggests that home buyers and home builders haven't been significantly discouraged by the rise in interest rates.

Purchasing Index

The purchasing managers index tracks business activity at more than 300 industrial companies A reading above 50% indicates a manufacturing expansion. Oct. '94: 59.7%

Source: National Assn. of Purchasing Management * MARKET REACTION: Stocks tumble and 30-year bond yields shoot up on economic report. D2

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