2 key indexes show vigor, little inflation Purchasing managers report rise to 52.6% in manufacturing activity

Leading indicators also up

Some think this may be the month that Fed raises rates

September 04, 1996|By Jay Hancock | Jay Hancock,SUN STAFF

New data yesterday showed that the national economy continued to grow at a healthy pace in recent weeks, drawing momentum from a blockbuster spring and still showing few signs of inflation.

The National Association of Purchasing Management said its closely watched index of manufacturing activity increased to 52.6 percent in August from 50.2 percent in July.

A score of above 50, the association says, shows that the industrial sector is expanding.

Another tea leaf uncovered yesterday, the July Index of Leading Indicators, also showed an increase -- its sixth in as many months.

The leading index, calculated by the Conference Board, a New York business group, rose by 0.2 in July after a 0.5 percent rise in June.

Several economists said the figures matched scenarios of solid but slower national growth in the third quarter.

"What these numbers suggest is that the economy continues at a healthy pace, but not the same numbers we got in the second quarter," said James Annable, chief economistfor banking company First Chicago NBD.

"But it may remain too strong for the Fed to be comfortable with it."

Continued economic strength may prompt the Federal Reserve to tighten the money supply and reduce short-term interest rates when its key policy-making committee meets Sept. 24, Annable and other analysts believe.

Some Fed members are concerned that the growing economy could spark inflation; higher rates would boost borrowing costs, slow spending and puncture inflationary pressures.

But the purchasing managers' survey, always one of the first signs of the previous month's economic performance, contained good inflation news: Raw materials prices paid by factories fell for the third month in a row.

And, despite the signs of industrial strength, purchasing managers surveyed by the group said the pace of business in August had "little or no change from July," said Ralph G. Kauffman, chairman of the business survey committee of the National Association of Purchasing Managers.

Driving the index higher was strength in the industries of apparel, furniture, leather, wood and metals, the group said.

The economy, once expected to slow or stop this year, surprised almost everybody in the first half of 1996 by shifting into overdrive. Economic output in the April-June quarter, as measured by gross domestic product, swelled at an annual rate of 4.8 percent. It was the second-fastest quarter since the last recession ended.

As it became clear that commerce would thrive in the first half, seers pushed the predicted slowdown back to the current quarter, "and it hasn't happened," said Bob Sweet, chief economist with Allied Investment Advisors in Baltimore.

Economists will be closely watching other key data to emerge this week. Major store chains will report sales results for the key August back-to-school season tomorrow, furnishing evidence of whether consumers continue their robust spending.

"It all boils down to, what will the consumer do over the next few months? Will the consumer continue to spend?" Annable said. "We had a very strong consumer sector in the first half of the year, and we don't think they can keep it up."

And on Friday, the Labor Department will report data on payroll growth, wage inflation and unemployment for August.

The payroll figures have shown striking growth this year, as the economy creates jobs at a very strong pace, and analysts said they'll be watching the employment data especially closely.

Analysts generally expect the economy to have added about 200,000 jobs in August.

Significantly lower job growth will be interpreted as symptoms of the long-awaited slowdown. Significantly higher job creation should substantially boost chances that the Fed will tighten this month, economists said.

Pub Date: 9/04/96

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