Wholesale Inflation Falls, Production Up : Analysts See Signs of Healthier Economy as Import Pressure Eases

WASHINGTON — After a rough January, the nation’s economic pulse improved modestly last month as inflation at the wholesale level abated and industrial production picked up, according to government reports issued Friday.

Although the outlook for the economy remains murky, analysts detected signs of a healthier future, with industry starting to recover from the battering it has taken from foreign competition, consumer borrowing leveling off and the basic rate of inflation staying about the same.

“On the surface, the overall growth in the economy is probably going to look remarkably similar to recent years,” said David Berson at Wharton Econometrics in Philadelphia. “But the hidden reality is that we are seeing a dramatic shift in the composition of growth as production improves even as domestic demand is slowing. The reason is, now that the dollar’s decline has finally forced importers to start raising their prices, we should be buying more from our own companies instead of from abroad.”

Energy Costs Level Off

Wholesale prices inched up by only 0.1% in February, as energy costs leveled off, after a 0.6% increase in January that was caused by a sharp increase in gasoline prices.

Meanwhile, output at the nation’s factories, utilities and mines jumped a solid 0.5% in February--the fifth consecutive monthly gain--following a revised 0.1% rise in January. An earlier report had estimated that industrial production had risen 0.4% in January.

In contrast to earlier forecasts of a weak kickoff for 1987 followed by stronger growth, many economists now expect relatively robust growth of at least 3% for the first quarter, with forecasts still clouded for later in the year.

Wild Swings in Auto Industry

The difficulty in reading the economic tea leaves has been compounded by wild fluctuations in the auto industry, which has been buffeted by the tax law changes that went into effect at the beginning of the year. Sales jumped and inventories plunged in December as consumers took advantage of their last opportunity to write off auto sales taxes on their income tax returns. In January, the exact opposite occurred; in February, sales and inventories leveled off.

Data Distorted by Cars

“All the recent month-to-month swings in production, prices and sales have been distorted by cars,” said David Wyss, a senior economist at Data Resources Inc. in Lexington, Mass. “But, if you average them out over the past three months, output is definitely on the rise. That’s encouraging.”

Indeed, in a related report that was also significantly affected by auto industry swings, business inventories in January jumped by 0.9% as sales dropped 4.5%.

Despite the absence of any significant inflation last month, most economists see moderate overall price increases of about 4% in 1987. Energy prices are expected to stabilize after last year’s dramatic fall, allowing the increases in other products to become apparent.

That inflation level is higher than last year’s 1.2% rise in consumer prices, but it is not significantly different from last year’s 3.4% underlying inflation rate, which excludes changes in energy and food prices.

“Inflation is going to pick up this year, but that’s primarily because we won’t have energy prices around to hide that underlying rate,” said Data Resources Inc.’s Wyss.

In February, prices for goods other than food and energy fell 0.3%, mainly due to cuts in car and truck wholesale prices as auto firms brought back factory-financed sales incentives.

Food Prices Down

Food prices dropped 0.5%, with the greatest declines in vegetables, pork and coffee, after falling 1.8% in January. Gasoline prices rose a more modest 5.5% in February after the 15.7% increase in the previous month.

“The good news is that the energy price increases are mostly behind us,” said Donald Ratajczak, an inflation specialist who runs the Georgia State University forecasting unit in Atlanta. “The bad news, though, is that we aren’t seeing price declines in many categories any more, while prices are picking up along a much wider spectrum than before. We’re going to see some higher prices ahead.”

The February increase left the producer price index at 292.3, meaning that goods that cost $10 in 1967 at the wholesale level cost $29.23 last month.

Auto Output Jumps

Meanwhile, the 0.5% rise in industrial production reported by the Federal Reserve was led by a strong advance in auto production, which jumped 5.3% to an annual rate of 8.3 million cars. However, the improvement in auto production is expected to be temporary, because planned cutbacks by U.S. firms should slow auto industry output slightly this month.

The production gain was somewhat less than many analysts had expected in the wake of the strong increase in employment and hours worked reported by the Labor Department last week.

“We’re not seeing the roller coaster effect many have been expecting,” Georgia State’s Ratajczak said. “The economy seems to be more like an ocean liner--it’s changing course, but very slowly.”