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U.S. Manufacturing Continues to Expand

Economy: Gains aren't seen as big enough to prompt a rate hike. Leading indicators also up.

September 04, 1996|From Times Wire Services

In an unusual twist Tuesday, good news for the economy didn't ruin Wall Street's day.

U.S. manufacturing continued to expand in August, though not enough to convince some investors that the Federal Reserve Board needs to raise interest rates to cool the economy and ward off inflation.

The National Assn. of Purchasing Management said its manufacturing index rose to 52.6 last month from 50.2 in July--only slightly above analysts' expectations of a 52.1 reading. A reading above 50 signals that more manufacturers are expanding than contracting.

"There is no strong reason for the Fed to tighten policy aggressively," said Kathleen Camilli, director of economic research at Tucker Anthony Inc. in New York. With few signs of inflation, "this is kind of a new era where the Fed doesn't need to respond to growth of 3% until there are genuine signs of overheating."

After soaring to a high of almost 7.19% earlier in the day, the yield on the benchmark 30-year Treasury bond slid to 7.05% after the purchasers report failed to confirm investors' worst fears about runaway growth. Stocks also reversed an early slide after the bond market recovered. The Dow Jones industrial average ended the day up 32.18 points at 5,648.39.

In addition, the U.S. missile raid on Iraqi military targets and further delays in allowing Iraq to return to world oil markets boosted oil stocks, leading a rebound in blue-chip issues.

Investors were jarred earlier in the day by a report from the Conference Board showing that its index of leading indicators, designed to predict economic activity over the next six to nine months, rose 0.2 point in July to a record reading of 103.1. The monthly gain was twice what analysts had expected.

The leading indicators index is seen by economists as most useful in forecasting the economy's direction rather than its pace. Three months' movement in the same direction is generally considered indicative of a trend.

The previous high for the index was the 102.9 set in June when it rose 0.5%. The index operates off a base of 100, set in 1987.

Bond investors don't like strong economic growth because of the threat of inflation, which erodes the value of their fixed-income securities. And stock investors fear rising interest rates because they drive up corporate costs, curb consumer spending and put pressure on profits.

The purchasing managers group said growth in manufacturing was fueled by strength in factory production, new orders and new export orders. The survey from the private industry group also calmed some inflation fears in reporting that prices paid by factories for raw materials fell for a third month in a row.

Two weeks ago, the Fed decided to leave interest rates unchanged, apparently unable to find persuasive evidence that the economy was growing so strongly that it threatened to boost inflation.

The leading index was first calculated in the late 1960s and was compiled by the Commerce Department until last year, when it was turned over to the private Conference Board in a cost-cutting move.

Of the leading index's 11 components, six rose in July. The biggest gains came in prices of sensitive materials, average weekly first-time claims for state jobless benefits, manufacturers' new orders for consumer goods and materials, and contracts and orders for plant and equipment. The most significant declines came in the average factory workweek, stock prices and deliveries by suppliers.

The Conference Board's report also contained two other closely watched economic gauges. The index of coincident indicators, a gauge of current economic activity including industrial production, increased 0.1 point in July after rising 0.3 during June.

The index of lagging indicators--including consumer credit and business loans, which generally improve or weaken after other parts of the economy--increased 0.6 point during July after showing no change in June.


Leading Indicators

Seasonally adjusted index:


1996: July: 103.1

Source: Conference Board

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