ISM Reports Manufacturing Continues to Expand, Prices Paid for Raw Materials Rise

The Institute for Supply Management said its factory index fell to 54.8 last month from 55.6 in December. Readings above 50 indicate growth. Prices paid for raw materials rose, order backlogs increased and delivery times lengthened.

The Institute for Supply Management said its factory index fell to 54.8 last month from 55.6 in December. Readings above 50 indicate growth, and the January reading compares with an average of 55.5 for all of 2005.

Prices paid for raw materials rose, order backlogs increased and delivery times lengthened, adding to the Federal Reserve's concern that capacity constraints pose a greater inflation risk, economists said.

The manufacturing group's gauge of prices paid rose to 65 from 63. The index of order backlogs rose to 53.5 in January from 49.5, and a measure of supplier delivery times increased to 55.3 from 52.9, indicating factories were taking longer to get goods to their customers.

``Higher prices are back, which bodes ill for those expecting a quick end to Fed rate hikes,'' said Richard Yamarone, chief economist at Argus Research Corp., in New York. ``It looks like inflation is going onward and upward in the first quarter.''

The ISM, based in Tempe, Arizona, surveys more than 400 companies in 20 industries including clothing, printing, transportation, furniture and plastics to compile its index.

Concern that inflation may accelerate because companies are bumping up against capacity constraints and are trying to raise prices to pass along higher supply costs prompted the Fed to raise its target rate by a quarter point to 4.5 yesterday.

The U.S. manufacturing group's new orders gauge, which makes up about a third of the total, fell to 58 from 59.1 in December. The production index, a measure of work being performed, dropped to 56.6 from 57.8.

The institute's inventories index dropped to 46.5 in January from 47.3. Inventory building contributed to economic growth last quarter for the first time since the first three months of 2005, the latest government data show.


The report follows recent data showing strength in manufacturing. Durable goods orders rose more than forecast in December, led by the biggest increase in business equipment since August, Commerce Department figures showed last week.


A Fed report on Jan. 17 showed industrial production rose for a third month in December, and the amount of capacity in use increased to the highest level since November 2000.

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