Factories feel impact of Fed's rate rises

June manufacturing grew but at slowest pace in 17 months

Economy

July 04, 2000|By BLOOMBERG NEWS

WASHINGTON - U.S. manufacturing expanded in June at the slowest pace in 17 months as companies began to feel the effects of six interest-rate increases by the Federal Reserve in the past year.

The National Association of Purchasing Management said yesterday that its monthly factory index fell to 51.8 last month from 53.2 in May. June's reading was the lowest since January 1999, when manufacturing began to climb out of a yearlong slump in export sales to Asia and Latin America.

"The cumulative impact of the interest-rate increases is beginning to bite," said Kenneth Mayland, president of Clear View Economics LLC in Cleveland. Manufacturing's momentum "is rapidly being bled away," he said.

Automakers are feeling the pinch. June sales of North American-built cars and light trucks fell 5.8 percent at General Motors Corp. and 9.8 percent at DaimlerChrysler AG's Chrysler arm, the companies reported yesterday. Industrywide sales fell an estimated 1.4 percent last month, the second straight monthly decrease.

At the same time, business at service companies and others not involved in manufacturing grew at a faster pace in June, another NAPM survey showed.

NAPM's nonmanufacturing business index rose to 64 last month from 61.5 in May, putting it close to its record of 65 set in April.

"The service side of the economy is going to continue to show steady and considerable growth" even as manufacturing shows signs of slowing, Mayland said.

The Commerce Department said construction spending barely budged in May, boosted only by an increase in work on factories and office buildings. Spending rose 0.1 percent in May after falling 1.1 percent in April.

Recent data point to cooler demand for U.S. manufactured goods other than semiconductors and other electronic equipment.

"It makes sense that orders might slow," said Tony Crescenzi, chief U.S. bond strategist at Miller, Tabak & Co. in New York.

"Ultimately, the production side of the economy is consistent with the demand side, and the demand side is slowing," Crescenzi said.

NAPM's manufacturing report showed that the production index, a gauge of current output, fell to 53.6 in June - the lowest since January 1999 - from 56.3 in May. The new-orders index, a gauge of current demand, fell to 50.6 in June - the lowest since December 1998 - from 51.1 in May.

NAPM's prices-paid index in June fell to 61.2 - the lowest since August 1999 - from 65.8 in May. The prices index has fallen since March, when it reached a five-year high of 79.8.

There are indications that higher prices, particularly for oil and other energy products, are cutting into manufacturing activity as some companies cut back on plans for expansion or close plants.

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