Manufacturing Edges Up in October

Mon Nov 1, 2004
By Jamie McGeever

NEW YORK (Reuters) - The U.S. manufacturing sector expanded last month but at a slower pace than economists had forecast, a report showed on Monday, suggesting the economic recovery remains on track, though not at full steam.

The headline number came in below expectations, but the components were mixed, maintaining market uncertainty on the pace of Federal Reserve interest rate increases in coming months.

"It still shows that the manufacturing sector is expanding," said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis. "(But) it shows caution among companies and their concerns about sales going into the fourth quarter."

Separate reports showed construction spending flat in September, while consumer spending and income data were slightly below expectations.

The Institute for Supply Management said its index of national manufacturing activity fell to 56.8 in October from 58.50 in September. Analysts' median forecast was 59.0.

A reading above 50.0 denotes expansion and below that level indicates contraction.

The new orders measure inched up to 58.3 while the prices index paid rose to 78.5 from September. But the employment component dipped to 54.8, while backlog orders shrank to 49.0.

Economists had viewed the strong Chicago Purchasing Managers index for October, released on Friday, as a precursor to a much-improved national reading.

But nationwide factory activity was more moderate, perhaps because manufacturing in the Chicago region centers more on the auto sector, said Ram Bhagavatula, chief economist for North America at Royal Bank of Scotland in New York.

"I don't think this shows a factory sector that's weakening ... but there's a continuing debate in the market as to what the Fed is up to," he said.

A quarter-point hike in interest rates next week is virtually guaranteed, he said, but not so the following month. "(The) December 15 (meeting) is up in the air."

Treasury bond prices initially rose slightly while stocks and the dollar retreated, only to reverse course later in the session after a sharp slide in oil prices.

Crude oil futures in New York fell 3.2 percent to $50.13 a barrel after earlier losing as much as 4.7 percent to trade below $50 for the first time in almost a month.

In U.S. stock trading, all three major indexes posted slight gains.


The Fed is expected to raise benchmark interest rates by a quarter point on Nov. 10, for the fourth time this year, to 2.0 percent, as it gets monetary policy back to what it considers a more neutral level. But a string of mixed recent economic indicators and rampant oil prices have fueled speculation it might stand pat in December.

Late afternoon in New York, the euro was down 0.3 percent at $1.2743, compared with around $1.2770 shortly after the ISM data. Treasuries prices were down, pushing the yield on the 10-year note up to 4.09 percent.

With the U.S. election on Tuesday and U.S. October jobs data due on Friday, the impact of Monday's data was limited.

Oil analysts said crude oil prices fell on speculation that Sen. John Kerry would win Tuesday's election and soothe the geopolitical friction that helped sparked the rally.

The Commerce Department said construction spending in September ran at a $1.014 trillion annual rate, $136 million lower than in August.

U.S. consumer spending climbed 0.6 percent, as expected, in September and inflation remained benign, as shoppers opened their wallets after showing restraint the previous month.

But the Commerce Department revised downward its August reading of personal spending to show a 0.1 percent decline, lower than the previously reported unchanged measure.

Personal income climbed 0.2 percent in September after a 0.3 percent gain in August. August's increase had initially been reported as a 0.4 percent rise.

A Reuters poll of analysts had forecast spending to climb 0.6 percent and incomes to gain 0.3 percent.

Inflation remained tame in September, with the PCE price index, a favored Fed gauge of price pressures, up by only 0.1 percent in both the headline and core measures.




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