Industry Operating Rate at 8-Year High : Falling Dollar Cited as Factory Use Reaches 82.1% in December

U.S. industry operated at 82.1% of capacity in December, the highest level in almost eight years, as smokestack America continued to benefit from the falling dollar abroad, the government reported Tuesday.

The Federal Reserve Board said the operating rate at U.S. factories, mines and utilities was up 0.1 percentage point from November as a big drop in activity at auto plants was offset by strength in other sectors.

For the year, the operating rate climbed 2.4 percentage points and stood at its highest point since March, 1980, when U.S. industry was producing at 83.7% of capacity.

During the 1981-82 recession, the operating rate fell below 70%, then climbed to 81.8% in August, 1984, as the nation recovered from the economic slump. However, manufacturers in many industries laid off workers and closed plants in 1985 and 1986 as stiff foreign competition cut into sales.

The Reagan Administration began a campaign in 1985 to force the value of the dollar lower in an effort to make U.S. products competitive again on overseas markets.

Economists said the effort finally began to show benefits last year, reflected in the 2.4 percentage point rise in the operating rate. By contrast, operating rates fell by 0.9 percentage point in 1986.

Analysts are counting on manufacturing to keep the country out of recession this year, believing that rising manufacturing employment and increased business investment spending will offset weakness from an expected slowdown in consumer spending.

“The manufacturing sector is still the star. There is no sign that the export side will fade, and that indicates continuing modest rises in utilization rates in the months ahead,” said Allen Sinai, chief economist for Boston Co.

Sinai said that he expected businesses to boost their spending on expansion projects, particularly in industries such as paper and chemicals that are already operating at close to full capacity.

Normally, when operating rates begin approaching 85%, economists begin to worry about bottlenecks, tight job markets and rising prices.

But David Wyss, an economist with Data Resources Inc., said there has been little indication of rising prices, in part because American companies don’t want to lose market share to foreign competition.

“Production of steel and chemicals is getting pretty tight in the United States, but there is a lot of unused capacity in Europe and elsewhere,” Wyss said. “We just don’t see the inflationary pressures out there. Certainly, the wage numbers aren’t indicating any problems.”

Steel factories and plants producing other primary metals operated at 89.2% of capacity in December, a remarkable 19.1 percentage points higher than a year earlier.

The Federal Reserve also revised upward the level of activity in October and November to 81.9% and 82%, respectively.