WASHINGTON -- Growth in the manufacturing sector slowed in August, while raw materials prices grew at their fastest pace in six years, the National Association of Purchasing Management said yesterday.
The private research group said its purchasing managers index fell 1.6 points to 56.2% in August from 57.8% in July. This is the 12th straight month that the index has exceeded 50%, indicating that the manufacturing sector is generally expanding.
But August's reading was the lowest in nine months, primarily because of smaller gains in new orders, production, and employment compared with July. The index is based on a survey of 300 purchasing executives in 20 key industries.
The group's raw materials price index surged to 74.5%, its highest level since 78.2% in August 1988. This is the fourth month in a row that the price gauge exceeded 70%. Readings above 47% over time imply higher producer prices in the future, the group said.
"This increase in material prices is one of the strongest concerns of purchasers, with some indicating inability to raise product prices to cover the increased material prices," said Ralph Kauffman, chairman of the group's survey committee. "All 20 manufacturing industries reported paying higher prices in August than in July."
The purchasing managers report is consistent with other recent evidence of some cooling off by manufacturing while price pressures have increased. The bond market sold off on Wednesday on an unfavorable price report by Chicago purchasing managers.
Economists said yesterday's report is consistent with the general view that inflation will increase gradually during the next 12 months, but with little chance of a dramatic upward spike in prices.
"This measure has been rising steadily since September 1993, suggesting inflation pressures are intensifying," said Veronika White, an economist with First Fidelity Bancorp. in Philadelphia. "It's certainly something to be concerned about but certainly not something to be neurotic about."
The index's price component generally moves more dramatically than actual prices because it reflects the proportion of purchasing managers reporting higher prices, not actual price changes, White noted.
In addition, she and other analysts said the decline in the overall index is an early indication that growth in the manufacturing sector may have peaked in the first half of the year and will be followed by slower growth in the final six months.
"It was one more sign suggesting that manufacturing along with the rest of the economy is slowing down," said Anthony Karydakis, senior financial economist of First Chicago Capital Markets Inc. in Chicago. "We've probably seen the highs for the year on the purchasing managers index."
However, Jeffery Given, chief economist of Genetski & Associates Inc. in Chicago, predicted that growth in manufacturing will remain robust in the coming months. "I still feel the economy is doing very well and the purchasing managers index will bounce right back," he said.
Other economic reports released yesterday were mixed.
The Commerce Department reported that construction spending grew 0.6% in July to $510.5 billion, seasonally adjusted, following a 0.3% increase in June. The July gain was in line with market expectations and was the fifth gain in a row. Construction spending was up 10.2% compared with the previous July.
The July increase resulted from a 3% advance in public construction spending, which more than offset a 0.2% drop in private construction. Within the private sector, spending for residential building slipped 1% in July while nonresidential building gained 1.2%.
In addition, the Labor Department reported that initial unemployment insurance claims gained 9,000 to 332,000 in the week ended August 27. This caused the four-week moving average to increase 4,250 to 326,250.
Karydakis said weekly claims seem to have stabilized in a range around 320,000 to 330,000, which "implies a certain amount of tightness in the labor market."
