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Manufacturing activity rises despite Katrina

The nation’s manufacturing activity expanded strongly in September, lifted by a surge in new orders that allowed the industrial sector to at least temporarily shake off the impact of Hurricane Katrina.
/ Source: The Associated Press

The nation’s industrial sector issued an upbeat but also worrisome assessment of itself Monday: While manufacturing expanded strongly in September, shaking off the impact of Hurricane Katrina, prices for raw materials surged, raising the likelihood of higher inflation and interest rates.

The Institute for Supply Management said its manufacturing index advanced to 59.4 percent in September from 53.6 percent the month before, for the industrial sector’s 28th consecutive month of growth. It was the highest reading since the gauge hit 59.6 percent in August 2004 and well above the 54 percent reading that analysts had expected.

A reading above 50 indicates the sector is expanding; below 50 indicates manufacturing activity is shrinking. The index is compiled from a survey of purchasing executives in industries across the country.

But manufacturers reported another sharp jump in prices last month as higher crude oil costs and transportation problems caused by the hurricanes boosted input costs. The price index rose to 78 percent in September, a 15.5 percentage point rise from 62.5 percent in August, the institute said. The price index had jumped 14 percentage points the month before.

Norbert J. Ore, chair of the institute’s business survey committee, said September’s strength came from expansion in new orders and production, but he also noted the possibility of higher inflation.

“While energy prices and the impact from Hurricane Katrina are major concerns, the manufacturing sector has regained significant momentum,” Ore said in a statement accompanying the numbers.

In Washington, meanwhile, the Commerce Department reported that construction spending climbed to a record high in August, helped by a renewed boom in housing. Even bigger gains are expected in coming months, spurred by the massive rebuilding required in the wake of Katrina, which hit the Gulf Coast on Aug. 29, and Hurricane Rita, which struck the coast last month.

The Commerce Department said total August construction spending rose by 0.4 percent, the biggest increase in three months. It pushed building activity to an all-time high of $1.11 trillion at a seasonally adjusted annual rate.

The increase did not include any hurricane-related activity because Katrina did not strike until late in August. But the government said all the spending on the rebuilding of homes and businesses in coming months will add to the construction figures.

The Institute for Supply Management, based in Tempe, Ariz., constructs its index from a survey of purchasing executives in industries across the country.

Anthony Chan, managing director and senior economist at JPMorgan Asset Management in Columbus, Ohio, said the report reflects “a level of optimism that was not dented as much as one would have expected by Hurricane Katrina.”

He said the growth in new orders, production and employment suggested that many manufacturers are operating as if they believe “the effects of Katrina will be short-lived.” And, he noted, this makes sense “when you start to realize all the stimulus that’s going to take place ... with the replacement of machinery and equipment and the rebuilding efforts in the Gulf states.”

The new orders index expanded to 63.8 percent in September from 56.4 percent in August. The production index rose to 63.1 percent from 55.9 percent the month before. The employment index rose to 53.1 percent in September from 52.6 percent in August.