NEW YORK—The sickly U.S. factory sector produced more bad news on Monday, with a gauge of manufacturing in New York state contracting in June for the fourth time in five months.
The report from the New York Federal Reserve highlights the dilemma for the Federal Reserve, which has tried to boost the slumping economy with aggressive interest rate cuts, even though this risks fueling inflation. Price growth is already elevated due to high oil and commodity prices.
In a separate report, the Treasury Department said foreign appetite for U.S. securities recovered in April after suffering during worst periods of the credit crisis.
The New York Fed's "Empire State" report on factories showed inflation pressures remained high in June. At the same time, it highlighted the weak state of the state's factory sector, boding ill for other regional reports to follow.
"The theme that came of this report is softer demand and elevated costs," said Jonathan Basile, economist at Credit Suisse in New York.
"Very high input costs are getting passed on. That's not necessarily good news for output in the coming months."
The New York Fed's "Empire State" general business conditions index fell to minus 8.68 from minus 3.23 in May.
The report reflects a national factory sector that had already contracted in May for the fourth consecutive month while inflation pressures surged to their highest in four years, as reported earlier this month by the Institute for Supply Management.
The factory sector has been hit by the wider U.S. economic slowdown, led by the bursting of the housing bubble last year.
Economists polled by Reuters had expected a reading of minus 2.00 in the Empire State report. Their forecasts ranged from minus 12.0 to plus 7.0.
On Wall Street, blue chip stocks were down 0.5 percent at midday, while the Nasdaq inched into positive territory. The dollar slid against the euro and government bonds, which benefit from weak economic conditions and poor stock market performance, rose slightly.
Bonds initially received a boost from a Washington Post column by Robert Novak that raised doubts over whether the Fed would raise interest rates to fight inflation.
Raising Doubts
Novak wrote that Federal Reserve Chairman Ben Bernanke does not intend to raise interest rates because he is more worried about soaring oil prices slowing global growth than he is about their firing inflation.
Novak's column, citing unnamed "sources close to him," said Bernanke "has no plans for a raise."
The Empire State survey is one of the earliest monthly guideposts to U.S. factory conditions. It will be followed on Thursday by the Philadelphia Federal Reserve Bank's report on factory activity in the U.S. Mid-Atlantic region.
The New York Fed's prices paid measure of June inflation eased to 66.28 -- its first drop since December 2007 -- from 69.57 in May. The May prices paid reading was the highest since the start of the data series in July 2001.
However, the gauge of prices received jumped to 26.74 -- the highest since January 2006 -- from 15.22 in May.
The rise in prices received could be worrying for inflation vigilantes since it suggests manufacturers are having success in passing their higher costs down the chain of buyers.
Net long-term capital inflows into the United States came in at $115.1 billion in April, according to the closely watched Treasury International Capital System data.
That was more than the $71.5 billion markets expected and up from a revised $79.6 billion the prior month. Analysts monitor the numbers closely to gauge how well the United States is managing to finance its enormous trade deficit.
The U.S. trade gap was $60.9 billion in April. The United States needs to attract enough capital flows to cover the trade deficit and, therefore, support the currency.
"The bounce in the April TIC data imply that foreign investors' appetite for U.S. securities normalized following the credit crisis peak in March," analysts at Action Economics said in a research report.
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