WASHINGTON -- A batch of unexpectedly robust economic reports yesterday prompted analysts to upwardly revise their already strong growth projections for the final three months of the year.
"Forecasts are definitely getting nudged up," said Michael Penzer, a senior economist at Bank of America in San Francisco.
The National Association of Purchasing Management reported its closely watched index for measuring growth in manufacturing gained 1.5 points to 61.2% in November. This was the third straight gain and 15th straight month the index has exceeded 50% -- the level that indicates an upswing in the industries sector.
Executives in 17 of the 20 industries surveyed reported an improvement in November from October, with many reporting gains in production, new orders, and employment.
Meanwhile, the Commerce Department reported personal income surged 1.4% in October while spending advanced 0.7%. Both gains were larger than expected and were the biggest in eight months, suggesting that consumers will continue to spend money and propel the economy in coming months.
In a separate report, the department said construction spending climbed 0.9% in October, as outlays for public and non-residential structures outpaced a continuing decline in residential building.
Finally, the Labor Department said initial jobless claims fell 12,000 to 317,000 in the week ending November 26, suggesting continued strength in the labor market.
The consistent and unanticipated strength in these reports motivated many economists to rethink their growth estimates for the fourth quarter. Penzer's outlook went from 4% to 4.5%. Chemical Securities Inc., is also carrying a forecast of 4.5%.
Other economists also said they expect to see solid growth in the last three months of the year, but not quite as much as 4%. Kurt Karl, a senior economist at the WEFA Group near Philadelphia, increased his forecast to 3.5% from 3%. And Paul Boltz, chief economist of Baltimore-based T. Rowe Price Associates Inc., raised his estimate to 3.5% from 3.25%.
"These reports clearly suggest solid growth will continue," said Michael Niemira, an economist at Mitsubishi Bank.
Yesterday's collection of statistics also raised the chances, albeit still relatively slight, that the Federal Reserve will raise short-term interest rates a seventh time this year at its next policy meeting on December 20, analysts said.
When the Fed tightened on Nov. 15, analysts did not expect to see another rate hike this year. But, said Penzer, "These sorts of numbers certainly raise the probably of a Fed tightening in December. The probability is low but rising."
Darwin Beck, director of the economics department at CS First Boston, said Fed officials will talk about raising rates at their December meeting but will ultimately hold off until next year. At that point, he anticipates another increase of 75 basis point in short-term rates, which would equal in size the Fed's last move on Nov. 15 to 5.25%.
But Karl of WEFA predicted the Fed will probably pull the trigger on rates again in December, rather than waiting until the following meeting, which is scheduled for January 31 and February 1. "We expect something in December," he said.
The purchasing managers' group also reported that its index measuring growth in raw materials prices fell slightly in November to 77.9% from 79.9% but remained at a high level, following three straight advances.
"While prices for November grew at a lesser rate than in October, the index is still at the second highest level since August 1988," said Ralph Kauffman, chairman of the group's survey committee. "With all 20 manufacturing industries reporting paying higher prices in November, the decline in the index was due to seasonal factors."
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