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Economy poised for summer of growth

By FRANK SCHNAUE, UPI Business Correspondent

Fresh economic reports showed Thursday the U.S. economy is facing a strong summer of growth, but there is a chance inflation pressures may heat up a bit as inflation at the wholesale level posted its biggest increase in May in 14 months.

Weekly jobless claims declined as several states closed their offices last Friday for the national day of mourning. And manufacturing in the Philadelphia area of the country expanded.

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The Labor Department said wholesale inflation as measured by the producer price index jumped 0.8 percent in May -- its largest rise since March 2003. The rise partly reflected higher food prices, which account for 21 percent of the index.

But, the government's closely watched core index, which excludes food and energy items, rose a more moderate 0.3 percent, its fastest pace in four months.

Economists on Wall Street were expecting the PPI to rise 0.6 percent after jumping 0.7 percent in April and 0.5 percent in March.

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Analysts said the latest report on wholesale inflation was consistent with other recent measures of inflation, which have shown prices rising steadily and indicating the global economic recovery is fueling inflation.

The government's latest report showed prices for finished goods rose across the board.

Food prices surged 1.5 percent after jumping 1.4 percent in April. Energy prices climbed 1.6 percent -- the same as in April. Gasoline prices skyrocketed 5.7 percent -- their largest gain since January.

Prices of capital equipment rose 0.3 percent after holding steady in April. Passenger-car prices rose 1.1 percent -- their biggest gain since March 2003. Prices of light motor trucks -- which include sport utility vehicles -- also rose 1.1 percent -- their biggest increase in seven months. But cigarette prices fell 0.7 percent, marking the biggest drop in a year.

Labor said overall inflationary pressures intensified in annual terms. In the 12 months that ended May, producer prices were up 5 percent, faster than at any time since the end of 1990. But the core index was up just 1.7 percent in annual terms, compared with a 1.4 percent gain in April.

Inflationary pressures ebbed further up the production pipeline. Prices of crude, or unprocessed goods, rose 2.8 percent in May after a 3 percent increase in April. Prices of intermediate goods rose 1.1 percent, slowing from a 1.4 percent rate in April.

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"Our general view is that inflationary pressures are not likely to be a serious concern in the period ahead," Federal Reserve Chairman Alan Greenspan told U.S. lawmakers earlier this week. Still, he said, if that expectation proves to be wrong, the central bank is prepared to raise interest rates as much as necessary to control inflation.

Labor also reported the number of workers filling for state unemployment benefits fell last week. But, the decline was partly due to several states closing their offices last Friday for the national day of mourning.

The Labor Department said the number of Americans filing first time claims for state unemployment benefits fell by 15,000 to a seasonally adjusted rate of 336,000 workers during the week ended June 12.

The government agency said the much-watched 4-week moving average, which gives a better perspective on the labor market's underlying trend, fell by 2,750 to 343,250 -- a sign that the nation's job market continues to improve.

The Conference Board said its index of leading indicators, which seeks to predict future economic growth, rose 0.5 percent in May to 116.5, after standing at a revised 115.9 in April. The index was equal to 100 in 1996.

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Most analysts on Wall Street were expecting the index to rise 0.4 percent.

Ken Goldstein, Conference Board economist, said, "The data reflects a robust economic environment this spring and points to more of the same this summer.

"There are concerns about the high cost of gasoline, milk and a possible rise in short-term interest rates, but almost one million new jobs opened up in the last three months to allay consumers' concerns," he said.

"The confluence of economic strengths is a recipe for continued job gains, and possibly a little more inflation," Goldstein said.

The Conference Board said gains in its index over recent months have been widespread and the 0.5 percent increase in May puts the gauge at a 3.5 percent to 4.5 percent annual growth rate.

Eight of the 10 indicators that make up the leading index rose in May. The biggest positive contributors to the index were average weekly manufacturing hours, money supply, and interest rate spreads. Weighing on the index, however, were consumer expectations and stock prices.

The good news on the probable path of growth for the U.S. economy is seeing widespread confirmation in a broad array of other economic news. The strength of overall growth has been around for some time now, and has been joined over recent months by a marked improvement in hiring as well.

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In that environment, the focus has shifted to what is happening on the inflation front. Federal Reserve officials have said over recent days that they aren't worried that price pressures are poised to flare up.

That has left market participants to expect that the central bank will implement a modest quarter-percentage point hike in its current 1 percent federal funds target rate when it meets on June 29-30. After that, the Fed is expected to raise rates gradually, as policy makers get the fed funds rate back to what they feel is a more neutral level.

In its report, the Board also said its index of coincident indicators increased 0.3 percent in May to 117.6 and the composite index of lagging indicators increased 0.1 percent to 97.9.

In other economic news, the Federal Reserve Bank of Philadelphia said Thursday manufacturing in the Philadelphia region expanded at a faster pace in June.

The regional central bank's June general economic index rose to 28.9 from 23.8 in May.

A number greater than zero signals a higher percentage of the manufacturers surveyed reported an improvement in business than deterioration.

The index reached a 10-year high of 38.8 in January and has been in positive territory since June 2003.

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Most economists on Wall Street had expected the index to rise to 25.3.

Philadelphia Federal Reserve Senior Economic Analyst Mike Trebing said, "Current indicators suggest that growth in the region's manufacturing sector is continuing. In the June survey, indexes for general activity, shipments, and new orders were up from their May readings. The employment indexes also remained positive this month."

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