Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, October 6, 1994 TAG: 9410060027
SECTION: BUSINESS PAGE: B-9 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
Analysts said the economy's vigor will lead soon to higher interest rates.
The Commerce Department said Wednesday that factory orders, which help measure future production, surged 4.4 percent in August, the biggest increase since they rose 5.6 percent in December 1992. Orders fell 2 percent in July.
Shipments, a measure of current production, did even better. They increased 4.5 percent for their best showing in 15 years.
``This is a lot stronger than expected. It's more evidence that manufacturing is strong. We can't dismiss it as a fluke,'' said economist Carl Palash of MCM Moneywatch in New York City. ``The Federal Reserve is going to have to tighten credit one or two more times this year.''
And, he said, ``the market reaction is reasonable given the economy's underlying strength.''
By early afternoon, bond prices had plunged and sent the yield on the benchmark 30-year Treasury bond to a two-year high of 7.95 percent. Stocks were off sharply as well, with the Dow Jones industrial average down 50 points and losers outnumbering gainers more than 6 to 1.
Factory orders have risen 11 times in the past 13 months.
They were expected to improve in August as automakers reopened plants after closing for two weeks in July to retool for 1995 models.
But the August surge was broad-based, with orders for nondurable goods such as food, fuel and clothing climbing 2.5 percent, the 10th straight gain and the largest since August 1990. Orders increased in all major industries except leather goods.
Jerry Jasinowski, president of the National Association of Manufacturers, insisted the gains were moderate.
``Manufacturing orders continue at a healthy pace that should yield growth of 2.5 percent in the third quarter,'' he said. ``These numbers are not too strong and not too weak. We have the capacity for 3 percent growth without inflation.'' The gross domestic product, which measures total goods and services produced in the United States, increased at an annual rate of 4.1 percent in the second quarter on top of 3.3 percent in the first quarter.
The Federal Reserve is looking for slower acceleration, analysts said, and is now practically certain to increase short-term interest rates by another half percentage point no later than Nov. 15, when central bank policy-makers next meet.
The Fed has boosted rates five times since February, most recently on Aug. 16, when it pushed the rates banks charge each other for overnight loans to 4.75 percent.
The economic expansion is in its fourth year, and manufacturing continues to be a mainstay of the growth.
Excluding the volatile transportation component, factory orders rose 2.4 percent in August, the biggest increase since they were up 3.2 percent in December 1992. Excluding military equipment, orders rose 4.4 percent - matching the overall gain.
Orders for both durable and nondurable goods totaled a seasonally adjusted $286.5 billion, up from $274.3 billion in July.
The backlog of unfilled orders declined 0.3 percent in August to $447.2 billion, matching its decrease in July. The orders backlog is often seen as a measure of whether current facilities and manpower are able to keep up with demand.
Inventories in August edged up 0.1 percent to $387.1 billion, after a 0.9 percent increase in July. The slight rise in inventories suggests that they are not excessively high and, analysts said, points to stronger growth this quarter after a predicted slowing in the third quarter.
Orders for durable goods, items expected to last more than three years, were up 6.1 percent to $154.2 billion, after falling 3.9 percent in July. Last week, the Commerce Department estimated durable goods orders rose 6 percent in August.
Orders for nondefense capital goods excluding aircraft rose 2.2 percent in August after falling 3 percent in July. These orders often are a barometer of business plans to expand and modernize.
by CNB