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Data point to a slowdown
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June 1, 2000: 10:23 a.m. ET
Economists say lower NAPM index shows Fed moves have begun to kick in
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - A pair of economic reports released Thursday provided fresh evidence that the red-hot U.S. economic expansion may be cooling off, boosting hopes of many businesses and investors that the Federal Reserve may hold off raising interest rates again.
The latest data suggested that the booming U.S. manufacturing sector is showing increasing signs of slowing down. The report by the National Association of Purchasing Management, an industry trade group, indicated that manufacturing activity grew at a much lower-than-expected pace in May.
Meanwhile, a separate government report Thursday showed a drop in spending on new construction in April, the biggest decrease in nearly a year.
Many observers say that these figures, in addition to other key gauges of the health of the economy released in the past week, are proof that the effects of six interest rate increases by the Federal Reserve over the past year are beginning to kick in. Other recent reports have shown dips in durable goods orders and new home sales, while U.S. retailers released lackluster monthly sales results Thursday.
"Clearly we're starting to see a pattern," said Art Hogan, chief market analyst at Jefferies & Co. in Boston. "The job that they're (the Fed) doing is starting to work."
 Stocks and bonds rallied Thursday in response to the market-friendly data. Wall Street strategists say that if the economy slows down - and the Federal Reserve is subsequently discouraged from increasing interest rates later this month - then cyclical investments sensitive to interest-rate pressure such as financial services, consumer staples and pharmaceuticals would be among the sectors that stand to gain.
"The only concern I do have is I'd like to see a couple more months (of data) put together here before we declare this torrid, hot economy as into another phase of gearing down," said Ned Riley, chief investment strategist at State Street Global Advisors. "I'm not as optimistic yet that we have slowed everything."
That caution didn't prevent investors from pouring into many of these blue-chip stocks Thursday. Banking and financial stocks were among the biggest winners. Merrill Lynch (MER: Research, Estimates) gained 5-7/16 to 104-1/16; J.P. Morgan (JPM: Research, Estimates) rose 3-1/4 to 132 and Citibank (C: Research, Estimates) added 1-3/16 to 63 3/8.
Technology stocks, which also stand to benefit if the cost of borrowing remains steady, also gained ground. Cisco Systems (CSCO: Research, Estimates) added 2-3/4 to 59-11/16, while Motorola (MOT: Research, Estimates) rose 5-3/16 to 98-15/16.
For businesses, the removal - at least for the time being - of the interest-rate cloud could place more Wall Street emphasis on earnings, which have largely been overshadowed by rate fears, Hogan said.
Earnings as a whole "have been great, but we've been completely ignoring that," he said.
Manufacturing activity dips
The NAPM index of manufacturing activity slipped to 53.2 percent in May, its lowest level since February 1999, from 54.9 percent a month earlier. That compares with expectations of a reading of 55.5 percent, according to analysts polled by Briefing.com.
A reading of 50 or higher indicates that manufacturing is accelerating. The overall index has been at 50 or above since February 1999.
"This is the first definitive evidence that we are starting to lose a little bit of vigor in this area," said Michael Moran, chief economist at Daiwa Securities. "We're still above 50 percent and still advancing, but we're not at the same pace of activity we were just a short time ago." (WAV451K) (AIF451K)
The "prices paid" component, a measure of producers' costs, dipped to 65.8 percent in May from 76.0 percent in April.
The NAPM, a trade organization that provides manufacturing data to corporate purchasers, surveys about 350 of its 45,000 members each month to track economic activity in 20 industries across the United States. The Federal Reserve and Wall Street closely track its monthly report because it is generated by the private sector and one of the more timely economic indicators to be released.
 Meanwhile, the Commerce Department reported that spending on new construction projects fell 0.6 percent in April to an annual rate of $757.3 billion, compared with flat forecasts by analysts and a downwardly revised 0.8 percent increase in the prior month.
It was the biggest decline since a 0.9 percent drop in May 1999.
Elsewhere, the nation's chain store retailers and department stores reported only modest gains in May sales. But industry analysts said sales were largely dragged down by lower apparel purchases due to colder-than-normal weather this spring, rather than interest-rate pressures on retailers.
"It's hard to conclude that it's the economy," said Bernard Sosnick, a retail analyst at Fahnestock & Co. "Not to say that I feel confident about consumer spending going forward, but judging from May sales I don't think you could conclude that there is a slowdown."
Jobs data ahead
Economy watchers now are looking ahead to Friday's release of the May employment report, a key inflation gauge that could provide a better picture of whether U.S. economic growth truly is losing steam, they said.
Analysts polled by Briefing.com anticipate that the May unemployment rate stayed steady at 3.9 percent compared with the prior month, and that 375,000 new non-farm jobs were created, up from 340,000 in April. The figures will be released Friday morning.
The Labor Department, meanwhile, reported Thursday that the number of Americans filing new claims for unemployment benefits edged up by a modest 1,000 to 286,000 last week, figures that suggest the job market remains tight. Economists consider any weekly jobless claims figure below 300,000 as an indicator that businesses may have trouble finding workers because of a shrinking labor pool.
Many economists say that the continuing tight labor situation may encourage the Fed to continue its policy of enacting aggressive interest-rate increases. However, the say, more key numbers will be released in the next few weeks that leave the Fed's ultimate decision up in the air.
"At this point, with the information in hand I'm still inclined to look for [an interest rate increase of] 25 basis points from the Fed, but we're seeing some numbers start to pop up that lead you to wonder exactly what the Fed may do," said Moran, of Daiwa Securities. "It's not inconceivable that they might decide to hold steady at the end of June."
Economist Mark Vitner of First Union Corp., meanwhile, predicts that the Fed will refrain from any action at the June meeting. However, another rate hike is likely at the August meeting, he said.
"We're thinking they skip this meeting in terms of raising rates and wait until they get a little more evidence of what the impact of previous rate hikes has been," he said. "We really only have one month's of data that is showing that things are slowing." 
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