Economy sends signals it is shifting to lower gear

The U.S. economy appears to be shifting into a lower gear with residential construction falling sharply and manufacturing activity slowing. The big question: Will the slowdown come in time to keep inflation from heating up?

Photo: Economy sends signals it is shifting to lower gear

Investors got mixed signals on inflation in a raft of new economic data on Thursday, with a key gauge of wage inflation posting an improved reading while a barometer of manufacturing prices posting a sharp increase.

Wall Street chose to focus on the benign inflation readings, but private analysts cautioned that lingering inflation pressures may prompt the Federal Reserve to push interest rates up one or two more times even as the economy slows to a more sustainable pace.

On the slowdown front, the Commerce Department reported that residential home building dropped by 1.1 percent in April, the biggest decrease since January 2004.

The drop was large enough to pull overall construction spending down by 0.1 percent after the building industry set a string of record highs in recent months, reflecting a boom period fueled by the lowest mortgage rates in more than four decades.

In other signs of slowing, a key gauge of manufacturing activity edged down to the lowest level in nine months. The Institute for Supply Management's manufacturing index dipped to a reading of 54.4 in May, down from 57.3 in April.

Analysts said manufacturing momentum has ebbed significantly over the past four months, reflecting weaker orders. But an inflation gauge tied to the manufacturing index jumped by the sharpest amount in eight months, reflecting rising costs for raw materials.

In areas of strength, many nationwide chain stores reported better-than-expected sales results in May as consumers shook off sagging confidence readings to shop with enthusiasm for clothing and other products.

But even there, the story was mixed as Wal-Mart, the nation's largest retailer, failed to meet analysts' expectations as its lower-income customers felt squeezed by $3-per-gallon gasoline, reports AP.

O.Ch.