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Managers' Index Signals Slowing Economy

Prices: Buyers of key supplies report soft demand. Analysts say Fed has room to ease interest rates.

March 02, 1996|From Times Wire Services

U.S. manufacturing weakened for the seventh straight month in February and price pressures also eased, according to a widely followed survey of U.S. purchasing executives released Friday .

The survey of managers who buy supplies for the nation's manufacturers, an important gauge of the economy's stamina, suggested that the Federal Reserve Board has more room to ease interest rates without inciting inflation. The Fed has eased rates three times since February 1995.

The National Assn. of Purchasing Management's index, based on survey results, increased to 45.2 in February from 44.2 in January. That still showed a weakening in the manufacturing sector because the index remained below 50. A reading of 50 or less signals a slowdown in manufacturing, while one above 50 shows an expansion.

But in a sign of reduced inflationary pressure, the survey showed prices that factories pay for raw materials weakened in February, with the price index falling to 38.3 from 39.4 in January.

Only 9% of purchasing executives reported paying higher prices, the lowest percentage since November 1992.

The report gives the Fed "a green light for another ease," said Scott Brown, an economist at Raymond James & Associates in St. Petersburg, Fla. "It points to continued weakness in manufacturing and a continued decline in inflationary pressures."

Brown predicted the Fed will probably lower the overnight bank lending rate by one-quarter point, to 5%, at the March 26 policy meeting, in part because the risk of recession remains.

Friday's report prompted U.S. bonds to post their biggest gain in more than six weeks.

The benchmark 30-year government bond rose about 1.25 points, or $12.50 per $1,000 bond, driving its yield to 6.37% from 6.47% on Thursday. It was the biggest gain since Jan. 16. The two-year note yield, which is more sensitive to expectations for Fed rate cuts, fell to 5.24% from 5.41%.

The purchasing managers' index has remained below 50 since dropping to 47.8 in August 1995.

"This is the ninth time in 10 months it has indicated a softness in manufacturing," said Ralph G. Kauffman, chairman of the association's business survey committee.

The survey showed production, new orders, order backlogs and employment all declined.

The snowstorms and cold weather affecting the Midwest and Northeast since the beginning of the year may have been a factor in the slowdown, but the effect was impossible to measure, Kauffman said.

Elsewhere in its report, the association's separate and closely watched price index, considered by some an indication of the inflation rate, fell to 38.3 from 39.4 in January. The price index has steadily fallen from a 15-year high of 87.5 in November 1994--and is now at its lowest point since May 1991.

The new orders index increased to 44.7 from 41.6 and the inventories index fell to 43.9 from 47.7--a sign that businesses may be poised to increase production. To be sure, the report also showed foreign demand for U.S.-made products weakened for the second consecutive month while factories continued to reduce payrolls for the 13th consecutive month.

The indexes don't measure how much factories produced or how far prices rose or fell. Instead, they gauge the number of manufacturers surveyed that reported increased production or paid more for raw materials.

Of 20 industries in the manufacturing sector, three reported an improvement in February: petroleum, primary metals and a miscellaneous category including sporting goods, jewelry, toys and musical instruments.

Commodities with the longest-running reports of price increases were methanol, natural gas and nickel. Those with decreases included corrugated shipping containers, paper, plastic resins, polyethylene, aluminum, copper and steel.

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