US factories moderate pace, raising hope for 'Goldilocks economy'

Thu Jul 1

WASHINGTON (AFP) - American manufacturing grew at a solid but slower pace in June, a survey showed, raising hope for a "Goldilocks economy" that would enable interest rates to creep up slowly.

The Institute for Supply Management (ISM) purchasing managers' index, based on a survey of supply executives, fell 1.7 point from May to 61.1 in June. Any figure above 50 points indicates expansion.

"The manufacturing sector grew at a slightly slower but still aggressive rate in June," ISM survey chief Norbert Ore said Thursday.

"June represents a strong finish to the first half of the year, and the current picture is very encouraging for the third quarter as new orders and production are still growing significantly," he said.

The news added weight to data suggesting the economy may be cooling a little in summer just as the Federal Reserve embarks on a plan for "measured" interest rate increases.

Business activity in the US Midwest braked in June to the slowest pace since October 2003, and national retail chain store sales slumped 1.2 percent last week in unusually cool weather, recent surveys found.

The number of new unemployment benefit claimants edged higher last week, the third consecutive increase, the Labor Department said.

Crucial June unemployment data will be released Friday.

Moderate growth -- not to hot, and not too cold -- sometimes described as the Goldilocks economy, is the fairy tale for financial markets who fear overheating would force the Federal Reserve to raise interest rates sharply.

"This report makes it clear that manufacturing is not going away anytime soon. It also gives some credence to the view that growth is now returning to more sustainable levels," said Joel Naroff, president of Naroff Economic Advisors.

"More moderate growth would keep inflation in check and allow the Fed to fulfill its dream of moving at a measured pace. As for the equity markets, sustainable economic growth means sustainable earning growth, which is also positive," he said.

Federal Reserve policymakers Wednesday raised the target for the federal funds rate, which commercial banks charge each other overnight, to 1.25 percent from a 1958 low of 1.00 percent.

Economists believe rates will return to a neutral level -- about 4.0 percent at the current inflation rate -- by the end of 2005.

With inflation relatively low except for some apparently transitory hotspots, Federal Reserve chairman Alan Greenspan and his colleagues said they expected to move at a "measured" pace.

But the policymakers vowed to do whatever is needed if inflation rears unexpectedly.

The June manufacturing report showed all sectors slowing modestly except for inventories, which grew for the first time in four years.

-- Output grew at a slower pace, with the production index down 1.6 points to 63.2.

-- Employment grew for the eighth month, but the pace decelerated a little, with the index easing 2.2 points to 59.7.

-- Prices rose for the 28th consecutive month but at a slightly easier rate than in May, with the index down 5.0 points at 81.0.

-- Growth in new orders slowed a little, with the index dropping 2.8 points to 62.8. Order backlogs, a barometer of future activity, rose at a slower pace, with the index down 4.5 points to 58.5.

"The June ISM report confirms that the manufacturing recovery is continuing at a solid pace," Manufacturers Alliance chief economist Daniel Meckstroth said.

"Indexes for all the major business indicators in the report such as orders, production, deliveries, etc., show that business activity in manufacturing is growing and that the pace of growth is relatively strong."

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