Report Triggers New Rally Investors Welcome Signs Of Slower Economic Pace

The stock market bulls got back from vacation Tuesday.

The Dow Jones industrial average rose 257.36 points - its largest oneday point gain ever - with investors relieved at news that the manufacturing economy cooled in August, making the Federal Reserve a bit less likely to raise interest rates.

The 3.4 percent rise left the Dow at 7,879.78 and was its biggest percentage gain in almost seven years. The jump nearly wiped out the previous week’s losses, but the Dow is still almost 380 points shy of its all-time closing high of 8,259.31 on Aug. 6.

After weeks of hints that the economy was accelerating, Wall Street jumped on news that the manufacturing economy’s growth cooled in August. The National Association of Purchasing Management survey, which is influential because it gives the earliest monthly readings on the economy, said its manufacturing activity index slipped to 56.8 percent in August from 58.6 percent in July.

The August figure was well below economists’ expectations of 58 percent and the index’s price measurement barely budged upward. The report eased fears that the robust economy would force the Federal Reserve to raise interest rates.

“I think to a great extent today’s National Purchasing Management report was a very substantial relief,” said Hugh Johnson, chief investment strategist at First Albany Corp.

The market fell from its record highs last month as suspicions mounted that the Fed would raise interest rates. Higher rates would ease inflationary pressures by slowing borrowing, but that might also hurt company profits.

But the market still has a load of numbers ahead of it that could shift conventional wisdom back in the direction of higher interest rates. Most notably, on Friday the Labor Department releases employment figures for August.

The NAPM report, which is based on a survey of purchasing managers around the country, indicated that the economy grew in August, but at a slower pace than in July. August marks the fifteenth consecutive month of expansion.

Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio, said investors were mostly reacting to a 0.2 percentage point rise in the group’s price index. The price index is closely watched for hints of inflation.

“The market was completely set up for a strong, firm number in this overall index, and possibly a 3- or even a 5-point jump in the price component,” Chan said. When the price change came in much lower, “the market was very relieved.”

In August, 20 percent of purchasing executives reported paying higher prices, while 10 percent said they paid lower prices.

Chan said the markets were also reacting favorably to a moderate increase in the association’s index of supplier deliveries. Investors had guessed that number, which measures the speed with which manufacturers deliver goods to suppliers, could have been pushed sharply higher by the teamsters strike against United Parcel Service.

In fact, the index of supplier deliveries rose by only 0.5 percentage point to 55.8 percent from 55.3 percent. Unfilled orders to manufacturers grew by 3.5 percentage points.