Manufacturing Picks Up, but So Do Price Pressures

U.S. factory output expanded in June for the first time in five months, but inflation pressures soared to their highest since the stagflation-ravaged 1970s, according to a report that highlighted the bind facing policy-makers.

AP

A separate report Tuesday by the government showed U.S. construction spending fell 0.4 percent in May as homebuilding continued to deteriorate, which will add to concerns the U.S. has entered a period of weak growth accompanied by high inflation.

The Institute for Supply Management said its index of national factory activity rose in June to 50.2, topping the 50 level that marks expansion for the first time since January.

Economists attributed the increase to a weak dollar which boosted exports and some restocking of inventories.

While the index was just above forecasts and May's reading of 49.6, the report also showed manufacturers are slashing jobs in while being pinched by soaring prices and weak demand.

Federal Reserve officials will pay particular attention to the prices paid gauge of inflation, which jumped to the highest since July 1979.

"Prices are downright ugly," said George Adell, fixed-income strategist at Commerce Capital Markets in Jupiter, Florida. "It paints a slowing-growth scenario with rising inflation. That's a tough path for the Fed to traverse."

The U.S. central bank has chopped interest rates to combat an economic downturn led by the worst housing slump since the Depression of the 1930s.

While the Fed has been seeking to promote growth, critics say policy-makers should focus on inflation by raising rates.

On Wall Street, the report provided a boost to stocks and the dollar, while pressuring government bonds, which benefit more from weak economic conditions and low inflation.

This year's manufacturing slump was the worst since 2003, when the ISM index spent five consecutive months below 50 from February to June that year.

However, June's rebound was slight and economists cautioned it by no means signalled an extended expansion.

Economists' median forecast was for an ISM result of 48.6, according to a Reuters poll. The 81 forecasts in the survey ranged from 46.0 to 50.5.

The ISM index of prices paid jumped to 91.5 from 87.0 in May. The employment index fell to 43.7 in June from 45.5 in May, hitting its lowest since May 2003.

Though U.S. construction spending slid overall in May due to the dismal residential sector, outside of home building private spending rose for the fifth consecutive month.

On the retail front, U.S. chain store sales rose 0.1 percent in the June 28 week versus a 0.6 percent decrease in prior week, according to the International Council of Shopping Centers and UBS Securities.

Chain store sales rose 2.2 percent in the June 28 week year-on-year versus the prior week's 2.2 percent gain, they said.