Surging Economy Heightens Concern Of New Rate Hike

By , Staff writer of The Christian Science Monitor

CR Metal Products Inc., a St. Louis metal fabricator, has been buying punch presses and lasers and renting additional space for the equipment. The company would love to hire workers to run the equipment, but it can't find any, so many of the firm's employees are volunteering for 80- to 90-hour workweeks.

``All the things that soak up capacity, we're doing as fast as we can,'' says David Walters, the company's controller.

The boom at CR reflects the surging manufacturing economy in the United States. Last week, new economic statistics painted a picture of a muscle-bound business environment. In its November survey, the National Association of Purchasing Managers (NAPM) in Tempe, Ariz. found that the manufacturing economy has been growing at its fastest rate since February 1984.

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With business booming, hiring is on the rise. The government reported Friday that the November unemployment rate fell from 5.8 percent to 5.6 percent, the lowest level in four years.

The day before, the government said the economy expanded at a real annual rate of 3.9 percent in the third quarter, instead of the preliminary estimate of 3.5 percent.

This economic surge has heightened concerns on Wall Street that the Federal Reserve Board might raise interest rates by as much as a full percentage point on Dec. 20. The unemployment report ``guarantees that more tightening is imminent,'' says Donald Straszheim, chief economist at Merrill Lynch & Co. in New York.

Some forecasters, however, expect the Fed to wait until late January, since there are some early signs that the past six Fed interest-rate hikes are starting to have some effect. For example, the Commerce Department reported on Friday that the Index of Leading Indicators fell in October for the first time in 15 months.

``The Fed rate hikes are having an effect, but we will still see stronger growth in the next few quarters, met by even higher interest rates,'' predicts Gary Shoesmith, a professor at the Babcock Graduate School of Management at Wake Forest University in North Carolina.

Burst of spending

Behind much of the economic surge is a new burst of capital spending by businesses unable to meet their customers' needs. Evidence of this spending can be found in the order books of the machine-tool industry, which produces the tools that make machine parts.

In this gold-plated year, the Association for Manufacturing Technology (AMT) in Washington reports that through Oct. 30, orders were up 45.4 percent from 1993 when they had risen 32 percent from 1992. Orders are expected to top $4 billion, the highest yearly total since 1980.

``We see a continued upturn as an underspent manufacturing sector realizes the only way to stay competitive is through productivity and quality,'' says Dan Meyer, chairman of the AMT and of Cincinnati Milacron, the nation's second-largest machine-tool manufacturer.

At this company, new orders have jumped about 20 percent. Milacron's aerospace business is down. But sales to the auto industry are up.

Detroit is expanding because it is barely able to meet demand for new cars. But automakers are not building new plants.

``They are increasing throughput [output] ... through the use of third shifts and increased line rates,'' says Randall Miller, national director of automotive consulting at Deloitte & Touche in Detroit, one of the Big Six accounting firms.

Mr. Miller says much of the billions of dollars in capital spending at the companies is going toward tooling up for new models or reducing bottlenecks. Also, automakers are taking some older plants out of mothballs and delaying closing outdated facilities.

The capital-spending boom is even reaching the once-beleaguered steel industry. In the US and Mexico, Prudential Securities Inc. in New York estimates that the industry will add 11 million to 15 million tons of capacity.

One example is a joint venture between the Australian company BHP Ltd. and North Star Steel Company, a division of Cargill Inc. in Minneapolis. They plan to build a 1.5-million-ton mill to supply hot-rolled steel for the auto industry starting in 1996. The mill, to be built in the Midwest, is expected to cost $400 million.

The capacity increases may help to take some pressure off prices. At CR, Mr. Walters says materials prices are ``going through the roof'' with shortages of steel and aluminum.

The NAPM survey found the greatest shortages in the printing and publishing industries, apparel, paper, and chemicals. The survey also found that prices, as a whole, declined slightly when compared with October.

Workers not restless

More important, workers are not restless. For example, CR Metals has not had much worker turnover despite long hours.

``People have been punished enough in the past, so that even though it is easy enough to get another job, they are not confident enough,'' Walters says.

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