Operating Rate at U.S. Factories Falls in Month : Lowest Level Since ‘83; Trade Imbalance Cited

The operating rate of American industry fell in October to the lowest level since 1983 as activity in the mining industry hit an all-time low and U.S. manufacturers continued to suffer from foreign competition, the government reported Monday.

The Federal Reserve Board said the nation’s factories, mines and utilities operated at 79% of capacity last month, after holding at 79.2% from July through September.

In a separate report, the government said the level of business inventories fell 0.3% in September, a somewhat smaller decline than had been expected considering strong auto sales that month. Analysts said retail inventories were still at high levels, meaning that consumers were likely to benefit from pre-Christmas sales and a return of auto financing incentives.

The 0.2 percentage point decline in production in October put the operating rate almost 3 percentage points below its peak in the current recovery in mid-1984. It was the lowest level since industry operated at 78.3% of capacity in December, 1983, one year after the recovery from the 1981-82 recession began.

In the past two years, U.S. manufacturing has been beset by widespread production cutbacks and job layoffs as a huge trade deficit has cut into sales both at home and abroad.

Trade Deficit Cited

“Manufacturing has been going down for the past two years because of the trade deficit,” said David Wyss, an economist with Data Resources of Lexington, Mass. “We have been selling a lot of manufactured goods, but we have been buying them from Taiwan rather than (from) our own industries.”

Wyss noted that the trade deficit has declined in the past two months, and he said this could be signaling better days ahead for American manufacturers.

But Michael Evans, head of a Washington consulting firm, said that while the trade deficit will look better, demand will be hurt by slack growth in consumer spending and business investment.

This weakness will keep the operating rate very near its current level and will mean no improvement in the unemployment rate, which is stuck at about 7%, Evans predicted.

“Businessmen are being very cautious. They really don’t believe that a recovery is around the corner,” he said.

The Reagan Administration is predicting that the economy will grow at an annual rate above 4% next year, indicating a level of strength almost double what many private forecasters believe is possible.

Mine Activity Down

Contributing to the weakness last month was a further drop in the operating rate in the mining industry, which fell to 72.5% of capacity, the lowest operating rate for mines since measurements began in 1967. The report said further declines in coal mining and oil extraction offset a slight gain in drilling of exploratory oil and gas wells.

Even with the small rise in oil and gas well drilling, this activity remained at less than half the level it had been just a year ago.

American manufacturers operated at 79.4% of capacity in October, down from 79.6% in September.

The decline included a 0.3 percentage point drop in the operating rate at factories making durable goods, which were producing at 75.9% of capacity last month, and a 0.1 percentage point decline at non-durable manufacturing plants, which operated at 84.7% of capacity.

The drop in the manufacture of durable goods--items expected to last three or more years--stemmed from cutbacks in auto production. Auto plants operated at 76.8% of capacity last month, down from 80.6% in September.

Evans said he expected little increase in auto production in coming months as auto makers try harder to keep inventories more in line with output.

Wyss said consumers may even see a return of cut-rate financing incentives if sales fail to improve from their dismal performance during October.

Inventories Too High

“It is clear that auto inventories are still too high, so they are going to have to start offering incentives again or really start chopping back on production,” he said. “I think they will put incentives back, but not as big a program as before.”

Analysts also predicted that retailers will be forced into pre-Christmas sales again this year in order to reduce high inventories of merchandise.

The report said inventories in September stood at a seasonally adjusted $588.4 billion; retail inventories were at an unusually high of $171.7 billion, 6.6% above the level of a year earlier.

The nation’s utilities operated at 81.3% of capacity, down from 80.7% in September.

During the 1981-82 recession, the industrial operating rate declined steadily, hitting a low of 69.5% in December, 1982. It then began improving, reaching a high in the current recovery of 81.8% in July and August, 1984, before the trade problems began cutting into production.