Prices manufacturers paid for materials rose to the highest in 25 years

U.S. Philadelphia Area Manufacturing Growth Rebounds (Update2) ListenListen

Oct. 20 (Bloomberg) -- Manufacturing growth in the Philadelphia area expanded more than predicted this month, adding to evidence the U.S. economy is strong in the face of surging energy prices spurred by Hurricanes Katrina and Rita.

The Federal Reserve Bank of Philadelphia's general economic index for October rose to 17.3 from 2.2 last month, the biggest increase in almost three years. A number greater than zero means a higher percentage of the factories surveyed in the area reported business was improving rather than deteriorating.

Prices manufacturers paid for materials rose to the highest in 25 years. Prices they received for their products jumped by the most since 1981, showing that companies may be having better luck passing those costs on to customers. The report may reinforce the Federal Reserve's view that faster inflation poses a greater risk than slower growth.

``Prices received rising so much is the first sign that businesses have increased power to pass on these energy-price increases,'' said Chris Rupkey, an economist at Bank of Tokyo- Mitsubishi Ltd. in New York. ``Energy will shortly be a major factor in the inflation equation, and this is what the Fed is worried about, so expect policy makers to keep pushing interest rates higher.''

The U.S. economy sustained the shock from the hurricanes and kept expanding, the Fed said yesterday. Governor Donald Kohn predicted that manufacturing will strengthen as companies rebuild inventories and said the Fed must focus on controlling inflation.

Economists expected the Philadelphia Fed index to rise to 10, according to the median of 50 forecasts in a Bloomberg News survey. Estimates ranged from a low of 4.6 to a high of 20.

New Orders

``Once you take out the impact of Hurricane Katrina, demand for manufactured goods remains pretty robust,'' Nariman Behravesh, chief economist at Global Insight in Lexington, Massachusetts, said before the report. ``The underlying strength in the economy is still pretty good.''

The index of prices received by factories increased to 32.6 this month from 8.6. The prices paid index for raw materials rose to 67.6 from 52.7 in September.

The new orders index rose to 18.6 in October from minus 0.5 in September. Unfilled orders increased to 0.8 from minus 10.9. The shipments index rose to 19.5 from 13.2, and the measure of inventories fell to minus 4.5 in October from 1.4.

Economists watch the Philadelphia Fed's survey of companies in Pennsylvania, Delaware and southern New Jersey for clues to the health of manufacturing nationwide. Manufacturing accounts for about 13 percent of the economy.

New York

Manufacturing in New York state expanded at a slower pace in October and factories were less optimistic about the future in the face of higher energy costs, a Federal Reserve index showed Oct. 17.

The two regional Fed reports will be followed Nov. 1 by the Institute for Supply Management's factory index report for the month of October. The index for September showed manufacturing growth accelerated.

Energy prices surged after Hurricane Katrina struck the Gulf Coast on Aug. 29, knocking out oil rigs and refineries. The costliest storm in U.S. history was followed on Sept. 24 by Hurricane Rita.

The hurricanes cut oil output by 57.6 million barrels since Aug. 26, the U.S. Minerals Management Service said on Oct. 14. Crude oil prices reached a record $70.85 a barrel on Aug. 30 and remained near that level through the end of September.

Energy Surcharge

Pittsburgh-based Alcoa Inc. said on Oct. 10 that profit at its main aluminum business fell 11 percent in the third quarter on higher costs for energy and raw materials.

Wyomissing, Pennsylvania-based Carpenter Powder Products Inc., a maker of specialty alloys, this week said it will add an energy surcharge to make up for the rising price of natural gas.

Wilmington, Delaware-based DuPont DuPont Co., the third- largest U.S. chemical maker, said Oct. 13 that damage costs from Hurricanes Katrina and Rita to plants in the U.S. Gulf Coast area were about $150 million.

The company said it is monitoring ``the inability to supply customers due to temporary plant and electricity outages, as well as broader impacts from dramatically higher energy and ingredient costs, higher transportation costs, and disruptions to the operations of its customers and suppliers.''

Forecasts Cut

The concentration of chemical companies in the region covered by the Philadelphia Fed manufacturing index makes the survey more sensitive to fluctuations in energy prices.

American consumers are also being squeezed. The average retail price of regular gasoline at the pump reached a record $3.069 a gallon the week ended Sept. 5, according to the Department of Energy. The price was $2.725 in the week ended on Oct. 17.

The storms prompted economists to lower their forecasts for economic growth. The median estimate in the latest Bloomberg News monthly survey of 71 economists was for gross domestic product to expand at an annual rate of 3.4 percent in the third quarter, compared with 4.1 percent in the last survey before Katrina.

Reconstruction following the storms will give the economy a lift, the Fed's Kohn said yesterday, helping to counter a slowdown in consumer spending.

``The economy retains a good deal of forward momentum,'' Kohn said in a speech at Carnegie-Mellon University in Pittsburgh, Pennsylvania.

Job Market

The hurricanes' impact on the labor market is starting to wane, a report earlier today showed. The number of Americans filing first-time claims for unemployment insurance fell to 355,000 last week from the prior week's 390,000, the Labor Department said.

``Katrina will be more of a positive for manufacturing demand as time goes by,'' Joel Naroff, president of Naroff Economic Advisers in Holland, Pennsylvania, said before the report. ``There's so much that's needs to be replaced and that demand would never have existed without Katrina.''