WASHINGTON -- Growth in manufacturing surged in October, exceeding expectations for a second straight month, while raw materials prices rose at their fastest pace in more than six years, the National Association of Purchasing Management reported yesterday.

Bond prices, already drifting downward in morning trading, headed further south after the report, which was released at the same time that the government reported stronger than expected construction spending in September.

The association said its purchasing managers index gained 1.5 percentage points to 59.7% in October. This was the 14th consecutive month that the index exceeded 50%, which indicates expansion in the manufacturing sector.

Separately, the Commerce Department reported that construction spending surged 1.6% in September, following no change in August.

Yesterday's reports eliminated any thread of doubt, if any still existed, that the Federal Reserve would raise short-term interest rates for a sixth time this year by its next scheduled policy meeting on Nov. 15, analysts said.

"It's a pretty obvious call at this point," said Stuart Hoffman, chief economist of PNC Bank Corp. in Pittsburgh.

The key question now is will the Fed raise the federal funds rate by more than 50 basis points in November and/or tighten again in December, Hoffman said. He predicted just one more half-point tightening move out of the Fed this year.

The October gain in the purchasing managers index was about three times larger than what analysts expected and followed a two-percentage-point increase in September, also on the high side of predictions. The rise in construction spending also was about three times bigger than what economists on average forecast.

"The index continues to tell us that U.S. manufacturing is in great shape and the economy has a bit more momentum than most people thought even a month ago," said Veronika White, an economist with First Fidelity Bancorp. in Philadelphia.

The private research group said 18 of the 20 manufacturing industries surveyed reported brisker activity in October, compared with 15 of 20 in September.

However, seven out of 10 survey respondents reported having to pay higher materials prices. "This matched the 70% registered in April 1988, which was the last time price increases were as widely dispersed," the group said.

The group's price index rose 2.8 points to 79.9% in October, which was higher than the 2.6 point gain in September and the 1.4 point increase in August.

"The report confirms everything we think about the economy," said Jeffrey Given, chief economist of Genetski & Associates Inc. in Chicago. He predicted robust growth will continue into next year, coupled with rising inflation. "It was a stunning report."

The Commerce Department said all major categories of building gained in September: non-residential construction surged 3.9%; public construction rose 1.9%; and residential building edged up 0.5%, despite a small decline in single-family homes, the report said.

But PNB's Hoffman and other economists cautioned against drawing too many conclusions about future inflation based on this price index.

They noted it's a diffusion index, which means it measures how many survey respondents are reporting higher prices but not actually how big those prices increases are. "It gives you the direction but not the magnitude of price gains," White said.

Manufacturers have been complaining about higher input prices for quite some time, Hoffman noted. The higher input prices could show up in higher retail prices, but they could also show up in lower profit margins and lower wage increases, he said.

Nonetheless, Hoffman predicted about 3.5% retail inflation by the end of next year compared to about 3% this year.

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