Factory Output Rises 0.5% to 3-Month High

Industrial production rose by 0.5% in May, the biggest increase in three months, while housing construction declined by a smaller-than-expected 2.7%, the government reported today.

In addition, the government said that the deficit in the nation’s broadest measure of trade narrowed slightly in the first three months of the year.

The Commerce Department said that the current account deficit declined by 2.3% from the final three months of 1986 to $37.12 billion. The deficit hit a quarterly record of $38.0 billion in the fourth quarter.

The current account measures not only trade in merchandise but also trade in services, which includes such items as investment earnings, tourism and foreign aid.

Economists were heartened by the lower deficit, but they warned that it would be years before the country’s status as a debtor nation begins to improve.

“This represents the tiniest of steps in the right direction,” said Allen Sinai, chief economist of Shearson Lehman Bros. in New York. “But the deficit still remains extraordinarily high and is one of the biggest problems facing the economy.”

Higher Than a Year Ago

The production report from the Federal Reserve showed the biggest increase in three months. It also revised upward the estimates for the past three months.

Instead of a 0.4% drop in production in April, which had been the largest decline in a year, the revised figures showed industrial production shrinking a much smaller 0.1%, after no change in March and a 0.5% increase in February.

The Fed said that industrial production now is 2.9% higher than it was a year ago.

Analysts said that the May increase and the upward revisions were good signs that the decline in the value of the dollar during the past two years finally is beginning to pay off in increased sales abroad by U.S. manufacturers.

Jill Thompson, senior economist at Data Resources Inc., predicted that auto sales will continue declining for the rest of the year. This would be a continuing drag on the overall production figures, he said.

In its housing report, the Commerce Department said construction of new homes and apartments fell to a seasonally adjusted annual rate of 1.62 million units last month.

Fixed-rate mortgages, pushed higher by investor fears over the falling value of the dollar and rising inflation, hit a high of 10.81% on May 22 and have since declined slightly to 10.66%, according to a weekly survey done by the Federal Home Loan Mortgage Corp.

Slower Pace Noted

Lyle Gramley, chief economist of the Mortgage Bankers Assn., said that the change has had a powerful effect on builders.

“They’ve seen a slowing down in traffic through developments and a slowdown in sales,” he said, “and they’ve had enough experience with rising interest rates not to gamble that sales will somehow rebound. So they began to pull in their horns.”

Lawrence Chimerine, president of Wharton Econometrics of Bala-Cynwyd, Pa., said the housing starts’ rate probably will remain below its spring pace for the next few months--and possibly longer.

“If mortgage rates stabilize, we’ll see housing starts stabilize by late summer,” he said. “But when you consider rates are higher than they were, and that there’s overbuilding (of multifamily houses), and the fact that demographics are indicating a shrinkage in the number of people who will be looking for housing, then we may have seen the highest numbers in housing that we’ll see for quite a while.”