NEW YORK – Faster-than-expected manufacturing growth in April led to rising prices in many raw materials – metals, fuel and corn-based products – fanning worries on Tuesday that inflation would keep the Federal Reserve from lowering interest rates.
The Institute for Supply Management said Tuesday that its manufacturing index hit the highest rate in 11 months, and that the prices component of the index surged to its steepest since July.
The manufacturing index registered 54.7 in April, above the March reading of 50.9 and Wall Street’s expectation of 51. It was the highest reading since last May’s 54.7. A reading above 50 indicates growth for the sector, while a reading below 50 indicates contraction.
The index of prices paid by manufacturers also surged to 73 in April, compared to 65.5 the previous month. Prices rose for all reported commodities including gasoline, aluminum, corn, diesel fuel and steel. No commodities prices fell, the report said.
The prices paid index reached 78.5 last July, but had fallen to 47.5 by December.
“So it’s quite a sharp change,” said Nigel Gault, economist with Global Insight.
Even though the U.S. economy has been fairly sluggish, the steep climb in prices shows the global economy is holding up well and manufacturers are facing rising costs, Gault said. Higher fuel prices also contributed to the spike.
“The question always is, to what extent do higher prices paid get passed on to the consumer? And how does that affect the inflation numbers the Fed is looking at?” Gault said.
The committee that sets Fed monetary policy meets May 9 and is expected to keep interest rates unchanged as it has since August. Strong manufacturing activity is healthy for many U.S. companies, but it also means the Fed is less likely to loosen credit policy to boost spending – especially amid rising inflation.
The ISM said the economy grew for the 66th consecutive month. New orders, production and employment drove expansion in the manufacturing sector.
The new orders index surged to 58.5 in April, compared to 51.6 the previous month.
“If businesses were cutting back sharply on investment spending, orders wouldn’t be bouncing higher,” Gault said.
Among the top performing industries in April were wood products; apparel, leather and allied products; food, beverage and tobacco; miscellaneous manufacturing; machinery; chemical products; transportation equipment, and computer and electronic products.
The ISM’s manufacturing sector index has bounced above and below the break-even point of 50 for several months, indicating the overall economy’s uncertain path. It showed contraction in November, rebounded in December, fell back again in January, then expanded the following two months.
The pattern matches the mixed bag of economic data recently, leaving investors uncertain about the direction of the job market, consumer spending and inflation.
A closely watched inflation gauge tied to the gross domestic product report last week showed core prices rose at a rate of 2.2 percent in the first quarter, up from 1.8 percent in the fourth quarter.
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