Manufacturing, consumer spending grow

Tuesday, November 2, 2004

NEW YORK -- Consumer spending rebounded in September while manufacturing activity expanded in October, though at a slower pace than the previous month, providing further evidence of continued but moderating economic growth on the eve of the presidential election.

Overall, those and other reports released Monday painted a picture of an economy that was still expanding but not as fast as in the summer. Manufacturers said they were concerned about higher prices for energy and commodities, which were eating into profits.

Given the somewhat mixed reading, the reports gave little new information to voters trying to make up their minds about how the economy has been faring under President Bush, said Ethan Harris, the chief U.S. economist at the Lehman Bros. investment bank.

"Right or wrong, the incumbent gets credit or blame for the economy," Harris said. "But the economy isn't breaking clearly for either candidate. It's a healthy economy, but the labor market remains in slow growth mode, and growth is moderating. ... I don't think the data are tipping the balance one way or the other."

The Institute for Supply Management reported that its index for manufacturing activity continued to indicate growth in October, though at a slower pace than in September and marking the 17th consecutive month of expansion.

The index came in below expectations at 56.8 and also below the reading of 58.5 recorded in September. While the indicator remains well above the level of 50 that indicates growing levels of manufacturing activity, the index had been above 60 for the first seven months of the year, suggesting that growth as been moderating.

"October continued a trend of slower growth, but that should be somewhat expected as manufacturing has experienced three quarters of strong growth so far this year," said Norbert J. Ore, chair of ISM's manufacturing survey committee.

The ISM also noted that there is "significant upward pressure" on prices for manufacturers, and that in particular higher prices for energy and commodities were "major concerns" for buyers of manufacturing supplies.

Separately, the Commerce Department reported that spending by consumers expanded at a robust rate of 0.6 percent in September, despite a modest uptick of 0.2 percent in personal income, as purchases of big-ticket items such as cars soared.

Consumer spending is closely watched by economists since it makes up two-thirds of economic activity. However, Harris said one key reason the September number was higher was that automakers brought back aggressive incentives for car buyers since they were "desperate" to clear out mounting inventories. Spending by consumers had been bumpy in recent months, falling 0.1 percent in August and rising 1.2 percent in July.

Growth in personal income was much more moderate, rising 0.2 percent in September following a 0.3 percent rise in August. The Commerce Department also reported Monday that construction spending was essentially flat in September after big gains of 0.9 percent in August and July.

The sharp slowdown reflected a 0.2 percent drop in residential construction, the first decline in this category since February 2003. Residential building activity, which still totaled $560 billion at an annual rate, has been red-hot in recent years, reflecting the lowest mortgages rates in four decades.

Gary R. Thayer, chief economist at the A.G. Edwards & Sons Inc. brokerage house in St. Louis, cautioned that the persistent signs of rising prices for manufacturers could mean more pressure on them to pass along higher prices for energy and commodities to consumers.

"Up to this point, you've seen some price increases being passed along to consumers, but it's been moderate," Thayer said. "I don't think we're out of the woods yet with inflation risk. The Fed has been raising rates in a bid to avert inflation, but the seeds of inflation are still there."

The Federal Reserve has been gently nudging short-term interest rates higher in an effort to stave off inflationary pressures. Thayer said he thought it was likely that the Fed would move again to raise rates at its next meeting Nov. 10.

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