Consumer Spending, Industrial Activity Rise Reports Renew Concerns That Fed May Hike Interest Rates To Cool Off Robust Economy

U.S. manufacturing improved in February from a month earlier, and consumer spending rose in January along with Americans’ incomes - signs of strength that could trigger a rate increase soon by the Federal Reserve.

The National Association of Purchasing Management’s manufacturing index rose to a strongerthan-expected 53.1 last month, led by gains in orders and production, from 52.0 during January. A reading of 50 or more means manufacturing is expanding. Before the report, analysts expected a February index of 52.3.

Consumer spending, meanwhile, increased by a larger-than-forecast 0.7 percent in January, fueled by a 0.3 percent rise in incomes, Commerce Department figures showed. The government also reported Monday construction spending posted a stronger gain than expected of 0.4 percent in January after falling a month earlier.

Taken together, the numbers suggest “the first quarter is off to a pretty good start,” said Cynthia Latta, an economist at DRI/McGraw-Hill in Lexington, Massachusetts. So strong, that Latta predicts the Fed will increase the target interest rate for overnight bank lending at its March 25 meeting to cool the economy as a way of guarding against inflation.

Indeed, a component of the NAPM report often cited by Fed Chairman Alan Greenspan, the supplier deliveries index, increased to 51.3 in February from 48.5 in January, a sign strong demand is slowing deliveries. “The way (Fed officials) have been talking, if they don’t act by March they’ll be accused of crying wolf,” Latta said.

Still, there was some negative economic news Monday. General Motors Corp. and Chrysler Corp. reported weaker February sales from a year earlier. Ford reports its results today.

The Treasury’s benchmark 30-year bond fell as much as 5/8 in trading after the reports, pushing up the yield as high as 6.85 percent. The bond recovered to yield 6.83 percent. The Dow Jones Industrial Average, meantime, fell almost 50 points in early trading before recovering to a 41.18-point gain on the day to 6918.92.

Following Greenspan’s warning last week that the Fed could raise interest rates in advance of clear signs inflation is accelerating, the February employment report due Friday could provide the necessary impetus for a preemptive rate increase.

For inflation-wary bond investors, the NAPM report hinted at higher production costs for manufacturers. The closely watched price index, considered by some an indication of the inflation rate, rose to 55.1 in February from 51.4 in January.

Meanwhile, the new orders index increased to 57.7 from 53.5, the production index climbed to 59.5 from 58.1, the backlog of orders index rose to 48.5 from 45.5 while the inventories index fell to 41.2 from 44.4.

The indexes don’t measure how much factories produced or prices rose or fell. Instead, they gauge the number of manufacturers surveyed that reported increased production or paid more for raw materials.

Of the 20 industries surveyed, 11 reported higher production in February, led by petroleum, textiles, wood and chemical manufacturers. The miscellaneous category, which includes toys and sporting goods, also showed strength.

“I think ‘97 is going to be a bang-up year for manufacturing - and for the economy as a whole,” said Kenneth Mayland of Cleveland-based KeyCorp. Manufacturing is “gathering momentum and on the verge of booming,” Mayland said.