U.S. economy steps up pace of expansion Factories busier, demand growing, but inflation is mild

Will Fed tighten May 20?

Some take heart from dip in costs of raw materials

April 02, 1997|By Jay Hancock | Jay Hancock,SUN STAFF

An early dispatch from the March economy arrived yesterday, and it suggested that last month's commercial activity mirrored January's and February's: strong growth, strong demand, little inflation.

The National Association of Purchasing Management reported that U.S. manufacturing expanded at its fastest pace in more than two years in March, that raw materials prices were steady and that both new factory orders and backlogs were growing.

The NAPM's index of factory activity, one of the first major indicators to appear after each month's end, climbed to 55.0 in March from 53.1 in February. A score above 50 is supposed to show growth.

Most managers answering the March survey "were more optimistic than in February, with many members indicating strength in their markets," said Norbert J. Ore, head of the purchasing association's business survey committee.

If confirmed by a Labor Department's March jobs report, due Friday, yesterday's figures boost chances that the Federal Reserve will increase short-term interest rates for the second time this year when top officials meet next month, analysts said. Higher rates would slow the economy and relieve inflationary pressures, which often accompany strong growth.

"We've got a good economy here, and I'm still looking for the Fed to boost rates on May 20," said Robert Sweet, chief economist for Allied Investment Advisors in Baltimore.

Two other reports yesterday added new detail to a remarkably consistent picture of economic expansion for February that had already been sketched in with previous data.

"The evidence is so uniform across so many sectors of the economy after the last several months that I'm convinced what you're seeing is real," said David Donabedian, senior vice president with Rothschild/Pell/Rudman, a Baltimore money-management firm.

Spending on new construction grew 2.3 percent in February compared with January on a seasonally adjusted basis, the Commerce Department said yesterday. That was higher than expected and the fastest growth in 11 months.

Also yesterday, the Conference Board, a private New York research group, said its index of leading economic indicators rose 0.5 percent in February, to 103.5. That was its biggest jump in a year, and higher than forecasts in the 0.2 to 0.4 range.

Stock and bond markets, which took back-to-back tumbles on Thursday and Monday and have been spooked by any signs of economic strength, accepted yesterday's reports calmly.

The reason: the purchasing managers' index of factories' raw material costs fell to 50.9 in March from 55.1 percent in February, a sign that the strong economy still isn't sparking greater inflation.

"That was a surprise," said Raymond Worseck, chief economist for A. G. Edwards & Sons, a St. Louis investment company. "That made the report a lot less threatening to the financial market, and especially the bond market, than the overall index would have done."

Owners of bonds and other debt instruments don't like price inflation because it erodes the worth of their securities, which have fixed face values. In response to inflation signs, bond owners and other lenders often demand higher interest rates, which in turn make stocks less attractive.

Economists now expect overall economic growth in the January-March quarter to rival the performance of the previous quarter, when the gross domestic product expanded at a strapping 3.8 percent annual rate.

"We are raising our estimate of first-quarter GDP growth to a 3.5 percent rate," Merrill Lynch economist Bruce Steinberg told clients yesterday. "Previously, we expected growth at around a 2.5 percent pace. But economic reports released during the past few days caused us to raise our growth estimate." Reports of strong residential construction, consumer spending, personal income growth, business investment and factory action all point to strong expansion, economists said.

Some economists, Steinberg included, still expect consumer spending to wane and the overall economy to slow substantially in the April-June quarter.

But more and more, the talk is not about whether the Fed will again raise short-term interest rates this year, but how much and how many times. Even though inflation is not visibly worse, economists said, recent growth is so strong that the Fed will feel compelled to fight inflation before the evidence appears.

Pub Date: 4/02/97

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