Prices, Jobs Data Suggest Economy Strong

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By Ellen Freilich

NEW YORK (Reuters) - U.S. producer prices rose at their fastest pace in a year in May, putting inflation concerns in focus, while a June regional factory index rose, and weekly jobless claims fell in fresh signs of a strong U.S. economy.

"The data keep investors on guard as they try to determine whether (Federal Reserve Chairman Alan) Greenspan's take on inflation is going to prove accurate -- that it's not going to become 'a serious concern,"' said Josh Stiles, senior bond strategist at IDEAglobal. "You see evidence that demand conditions are still quite strong."

Prices received by farms, factories and refiners rose by a greater-than-expected 0.8 percent last month, the largest jump since March 2003, the U.S. Labor Department said Thursday.



While food and energy prices both rose sharply, the department's core producer price index, which strips out those volatile costs, gained a larger-than-expected 0.3 percent, adding to inflation jitters on Wall Street.

Also, a mid-Atlantic regional manufacturing survey showed strength, though there was some weakness in the index's components, analysts noted. The Philadelphia Federal Reserve's June business activity index climbed to 28.9 from 23.8 in May, beating forecasts of a rise to 25.0.

In a separate report, the U.S. Labor Department said first-time filings for state jobless aid fell 15,000 to 336,000 in the week ended June 12, their lowest level since early May.

While the Labor Department pinned some of that drop on the closure of state claims offices last Friday for the funeral of former president Ronald Reagan, claims have been hovering at levels indicating an improving labor market.

Also on Thursday, the Conference Board, a private business group, said its index of leading economic indicators rose 0.5 percent in May to 116.5, suggesting the U.S. economy's momentum is likely to build in the coming months.

Stocks lost ground as a rise in oil prices and the higher producer prices last month stoked inflation worries. The Standard & Poor's 500 Index slipped 1.53 points, or 0.13 percent, to 1,132.03. The blue-chip Dow Jones industrial average ended down 2.06 point, or 0.02 percent, at 10,377.52.

The U.S. Treasury market took a broader view of the inflation readings. Soft employment and price readings from the Philadelphia Fed's factory survey offset the effect of higher producer prices and fewer jobless claims. The benchmark 10-year note advanced 11/32, its yield easing to 4.68 percent from 4.72 percent on Wednesday.

"The combination of the deeper-than-expected drop in initial state jobless claims and the three-tenths of a percent rise by core PPI tell us that investors still need to worry about the possibility of rising price inflation," said John Lonski, chief economist at Moody's Investors Service.

But U.S. Treasury debt prices pared losses after the Philadelphia Fed survey revealed enough areas of softness to force short-covering in a bearish market.

STRENGTH IN NUMBERS

The Philadelphia Federal Reserve's June business activity index climbed to 28.9 from 23.8 in May, beating forecasts of a rise to 25.0.

"We saw moderation in the indices on prices paid, employment, and six-month business conditions outlook," said Stiles. "That offset the impact of the headline number."

On PPI, economists polled by Reuters had expected a somewhat milder 0.6 percent rise and had looked for a smaller 0.2 percent gain in the core index.

Federal Reserve officials meet on June 29-30 and are widely expected to push overnight interest rates up a notch from their current 1958 low of 1 percent as they begin a bid to head off inflation.

Fed officials have said they should be able to move rates up at a "measured" pace, but a pickup in inflation has fanned fears in the markets the Fed may need to move more aggressively.

"This shows that the Fed needs to be aware that inflation is coming back and start on the program of raising rates," said Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis.

The report on jobless claims offered further evidence of a strengthening in the U.S. jobs market that has also helped open the door to higher interest rates.

The drop in first-time applications for unemployment aid to 336,000 showed a slower pace of layoffs than Wall Street had expected. Economists had looked for claims to slip to 345,000 from the 352,000 previously reported for the June 5 week.

A four-week moving average of claims, which smoothes weekly volatility to provide a better picture of underlying trends, slipped 2,750 to 343,250. The average has been hovering since early March near levels not seen since early 2001, before the economy tipped into recession.

A drop in the overall number of unemployed workers on the benefit rolls has underscored the strides made in the labor market.

In the week ended June 5, the latest week for which data are available, the number of so-called continued claims rose by 31,000 to 2.9 million. However, a week earlier that figure had hit its lowest level since May 2001.