8:58 AM
By Steven C. Johnson and Lucia Mutikani
NEW YORK/WASHINGTON | Fri Oct 1, 2010 11:29am EDT
NEW YORK/WASHINGTON (Reuters) - Manufacturing growth slowed last month and inflation remained subdued in August, data showed Friday, leaving the door open for the Federal Reserve to launch a fresh round of monetary policy easing.
Data also showed both consumer and construction spending rose more than expected in August, but investment in private projects fell to its lowest level in more than 12 years,
Taken together, the data implied economic activity rose modestly in the third quarter after growth slowed to a 1.7 percent annual pace between April and June.
But it hardly painted a picture of a robust economy more than a year removed from recession, and analysts said that was likely to keep markets bracing for the Fed to act.
"More quantitative easing is on the way. The Fed may see the track of growth being too slow. It may be too close for comfort for them in terms of deflation. I don't know whether they will do it (QE) in November or December," said John Canally, an economist at LPL Financial in Boston.
New York Fed President William Dudley on Friday said high unemployment and low inflation were "unacceptable," adding that more action was probably warranted if the economic outlook didn't improve.
The Fed said last month it was ready to pump more money into the economy to shore up growth and avert a harmful downward spiral in prices. It has already driven benchmark interest rates near zero and bought $1.7 trillion of mortgage-backed and Treasury debt to bolster growth. It holds a policy meeting November 2-3.
MANUFACUTRING SLOWS, INFLATION LOW
Though a small slice of the economy, manufacturing has been a bright spot, with the sector having expanded for 14 straight months. But the pace of growth has slowed in recent months; in September, the Institute for Supply Management's index slipped to 54.4 from 56.3 and employment in the sector also fell. New orders also slowed for a fourth straight month.
Separately, the Commerce Department said consumer spending, which accounts for about 70 percent of U.S. economic activity, increased 0.4 percent after rising by the same margin in July.
But the Fed's preferred measure of consumer inflation -- the personal consumption expenditures price index, excluding food and energy -- rose only 0.1 percent for a fourth straight month. In the 12 months through August, the core PCE index increased 1.4 percent for the third consecutive month.
The Fed warned last week that underlying inflation was below levels policymakers viewed as consistent with the U.S. central bank's mandate of full employment and price stability.
The ISM report and other data on Friday "reinforces the point that Dudley said....that the economy doesn't have to deteriorate at all from here for the Fed to ease," said Carey Leahy, economist at Decision Economics.
U.S. stock prices trimmed earlier gains and Treasuries cut losses after the data.
SPENDING EDGES UP BUT SENTIMENT STILL WEAK
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