Nearly two weeks ago, Federal Reserve Board Chairman Alan Greenspan, only days before the Fed raised a key interest rate, voiced concern that rising wages could begin putting inflationary pressure on the economy.
On Monday, in a reminder ofGreenspan’s observation, the Commerce Department reported incomes of Americans rose at the strongest rate since the middle of last year.
At the same time, the Chicago Purchasing Managers Index showed no sign of slowing in the manufacturing sector, just another indication that the economy, particularly in the Midwest, is steadily gaining momentum.
It virtually assures that the National Purchasing Managers Index, to be released Tuesday, will show that manufacturing nationwide is keeping pace with the Midwestern expansion. Economists watch the Chicago report because it tends to predict conditions nationwide.
“The manufacturing sector continues to outperform the overall economy, and there’s no reason to think it won’t continue that way,” said Diane Swonk, chief deputy economist for First Chicago NBD Corp.
The Chicago index of regional manufacturing activity rose to 57.5 in March from 56.2 in February. A number of more than 50 means more manufacturers reporting improved business than declining business.
For Swonk and other economists, the Monday data were just one more indication that the nation’s economy is growing at a much faster annual rate than preferred by the Fed and Greenspan.
“It’s in the 3.5 to 4.0 percent range,” said Swonk, noting that the Fed aims for keeping the economy growing at a non-inflationary 2.5 percent rate.
The growth rate, says Robert Dederick, economic consultant to the Northern Trust Co., “is too fast for the Fed’s comfort.”
And the market, he said, seemed to believe that the nation’s booming economy virtually assures that the Fed will increase rates again when it meets on May 20.
“That’s the clear fear,” said Claire Zempel, chief economist for Robert W. Baird & Co. in Milwaukee. Already the market has begun debating whether the Fed will raise rates by .25 of a percent or more, he said.
It’s a debate that was prompted by Monday’s personal income figures. Not since last June have they risen as fast.
Total income from wages, salaries and all other sources jumped 0.9 percent to a seasonally adjusted annual rate of $6.71 trillion–matching last June’s 0.9 increase and more than more than doubling the 0.4 percent gain in January.
Spending increased by just 0.3 percent to $5.33 trillion a year, following a 1.0 percent increase in January. It was the smallest rise since a 0.1 percent increase last September.
Tempering the news, albeit only moderately, were indications from the Commerce Department that consumers apparently used the extra money to bolster savings. Savings climbed to 5.5 cents out of each dollar earned, up from 5.1 cents in January.
The big jump in incomes evidently flowed from a surge in job creation during February. “Employment, average hourly earnings and average weekly hours all increased in February,” the department noted.
But Dederick said the income numbers should be taken with a grain of salt.
“These numbers are bit flaky. They include a surge in employment and the workweek that was related to the mild weather,” he said.
Still, all the economic reports appear to indicate that for the first quarter, consumer spending rose at about a 5 percent rate, according to Swonk, far above what the Fed would like to see.
The possibility of higher interest rates dragged heavily on the stock market as the Dow Jones industrial average, which at one point was down 175 points, or nearly 2.7 percent, closed at 6583.48, down 157.11, or 2.3 percent.
Underlying the concern, according to Zempel, are fears that last week’s .25 percent increase in the Federal funds rate, to 5.5 percent, could be the beginning of a series of rate increases similar to the six increases that occurred in 1994 as the Fed moved to stomp out inflation.
Dederick said the market now fears that short-term interest rates could be at 6 percent by the end of the year.
“Once rates start moving, people start pushing their forecasts,” he said.
