Slower, steady gains hinted

From Wire Reports
July 2, 2004

NEW YORK - A day after the Federal Reserve raised key interest rates, signaling a rebound in the economy, a series of reports yesterday indicated that the pace of the recovery is slower than expected.

The numbers and speculation about the potential consequences of higher rates worried investors, who in turn roiled stock markets and sent shares tumbling. The Dow Jones industrial average dropped 101 points to 10,334; the Nasdaq composite index tumbled 32 points to 2,015; and the Standard & Poor's 500 index declined 11 to 1,128.

The Institute for Supply Management said its manufacturing index declined to 61.1 in June from 62.8 in May. A reading above 50 indicates expansion, but this one was somewhat lower than the 61.5 forecast by analysts even though it held close to a 20-year high.

The gauge's June reading showed manufacturing activity expanded for a 13th straight month, growing at a still robust, but more measured pace, analysts said.

"A slower pace that is still a solid pace is what these numbers are beginning to point to, and that's key," said Joel Naroff of Naroff Economic Advisors in Holland, Pa. "This is a level that's still very good, but will create fewer inflationary pressures.

"The manufacturing sector remains quite strong, even if the rate of growth is cooling a bit," he said, noting that factories "are hiring more people and have even started building inventories."

Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis, said, "We are still talking about a very high level of activities. Starting from a very low base, we are still seeing some strength."

Also yesterday, the Commerce Department reported that construction spending increased 0.3 percent in May from April to a seasonally adjusted annual rate of $988.5 billion, an all-time monthly high and the fourth straight month of gains. Analysts, however, had forecast a 0.7 percent increase.

Although the increase for May is less than the 1.2 percent gain in April, the report still indicated that the construction market is in fine shape.

The value of residential projects on which private builders broke ground also rose to a record rate, $532.3 billion in May, representing a 0.8 percent increase from April - a sign that builders still feel good about housing demand, even as interest rates are on the rise.

In addition, the Labor Department reported that first-time claims for unemployment insurance rose by a seasonally adjusted 1,000 to 351,000 for the week that ended June 26.

Economists had been forecasting a small decrease, but the figure continued to suggest that the pace of layoffs is moderating.

Economists are expecting the nation's unemployment rate to hold steady at 5.6 percent for June when the government releases its employment report today. They believe that hourly earnings for workers should go up by a modest 0.3 percent from the previous month and that the average work week should rise slightly to 33.9 hours.

The manufacturing report showed that of 20 industries in the sector, 17 enjoyed growth in June, led by instruments and photographic equipment, rubber and plastic products, wood and wood products, and industrial and commercial equipment and computers.

"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," said Norbert J. Ore, who heads ISM's survey committee.

The robust-but-slower growth signaled in the overall index was echoed in most of the other indicators tracked by ISM. Those indicators showed that manufacturers continue to pay more for materials, but the rate of increase slowed somewhat. They also indicated that manufacturers continue to hire, but more gradually, and orders to manufacturers continue to increase, but at a slower pace.

The ISM report also showed that manufacturers' inventories grew slightly in June, the first increase in more than four years - a change which Naroff termed particularly significant.

"It means we're getting the second round of demand showing up," he said. "Now we [manufacturers] have enough confidence ... that customer demand will continue to be good and firms are laying in inventory to meet that demand."

The Associated Press and Bloomberg News contributed to this article.

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