Industrial Output Rise of 0.4% Cools Analysts’ Recession Fears

Output in the industrial sector climbed a healthy 0.4% last month as U.S. industry continued to show strong gains despite the October collapse of the stock market, the Federal Reserve Board reported Monday.

In a separate report, the Commerce Department said U.S. business inventories rose $5.55 billion, or 0.8%, during October to a seasonally adjusted $687.87 billion. The October increase came after a $3.88 billion, or 0.6%, gain in September.

A combination of rising inventories and falling sales is often viewed with alarm by economists, who worry that businesses will cut production in an effort to work off unwanted inventories.

The Federal Reserve report said output at the nation’s factories, mines and utilities recorded widespread increases in November after a sizable 0.9% October advance.

The November output figure was up 5.4% over the same period last year.

“The strength in industrial production is encouraging because it suggests that manufacturers have remained optimistic after the stock market crash,” said David Wyss, senior financial economist at Data Resources Inc. “This gives us further hope we will stay out of a recession.”

The data on industrial production showed that American manufacturers have continued to benefit from the two-year decline in the value of the dollar, which has made their products more competitive on world markets.

Industrial output is up 5.4% from a year ago, an increase substantially above the growth in 1985 and 1986, two years when foreign producers made deep inroads into sales by American manufacturers. In both of those years, industrial output rose by less than 2% annually.

Economists said the Administration’s effort to drive the value of the dollar lower has paid off this year with big gains in export sales by American manufacturers even though the trade deficit in dollar terms has gotten worse because the imports are now more expensive.

“U.S. industry is the star of the economy at this point,” said Allen Sinai, chief economist of Shearson Lehman Bros. of New York. “With the exception of autos, there is widespread strength in most industries.”

In addition to the solid November increase in output, the government revised the October advance to 0.9%, the best showing since July. The October gain was originally reported as a 0.6% rise.

Autos were assembled at an annual rate of 7.1 million units last month, down from a rate of 7.3 million units in October. Production of trucks for business and consumer use fell as well. Analysts said this sector was likely to remain weak in coming months as auto makers cut back on production in the face of weaker-than-expected car sales.

Consumers Watched Closely

Output of home goods, which had dropped sharply in September, rose 1.2% in October and and 0.5% in November with the gains led by increases in production of furniture, appliances and carpets.

The consumer category is being closely watched because economists believe that turmoil in the stock market will show up first in this area.

“If consumer spending weakens over a period of three to four months, then this could have a ripple-through effect that would force manufacturers to cut back on production, but there is no evidence of that yet,” Sinai said.

Production in the nation’s mining industry fell by 0.2% in November but was still 4.3% higher than a year ago. This sector, which includes oil and gas well drilling, has been posting moderate advances this year after suffering deep drops in 1986 because of the falling price of oil.

U.S. gas and electric utilities enjoyed a 0.6% increase in production in November following an even sharper 2.4% rise in October.

The various changes left the industrial operating rate at 132.5% of its 1977 base of 100.

The Commerce Department said the big jump in inventories came as sales edged down 0.1% to a seasonally adjusted $462.2 billion following a 1.1% jump in September.

Inventories are being watched even more closely following the collapse of stock prices in October, an event that many analysts believe will result in cutbacks in spending by jittery consumers.

Beating Price Rises

However, some analysts said the October inventory increase, the largest since a 0.9% advance in May, was not particularly worrisome because it stemmed in part from a big jump in imported goods being brought into the country by retailers trying to beat future price rises.

The report on inventories showed that stocks held by wholesalers climbed the fastest in October, rising by 1.3%, followed by increases of 0.8% at the retail level and 0.5% at the manufacturing level.

The 0.1% drop in overall sales was led by a 0.9% plunge in sales at retail stores. The government reported Friday that retail sales recovered somewhat in November, rising by 0.2%.

Sales at the manufacturing level were up 0.2% in October, while sales at the wholesale level rose by 0.4%.

The combination of rising inventories and falling sales pushed the inventory-to-sales ratio to 1.49 in October compared to 1.48 in September. This means it would take 1.49 months to exhaust existing inventories at the October sales pace.