Industrial Capacity Hits 8-Year High; Inflation Fears Up
U.S. industry in June operated at its highest point in eight years, edging closer to a level that economists believe signals a pickup in inflation, the government said Monday.
The Federal Reserve Board said American factories, mines and utilities operated at 83.1% of capacity last month, up 0.2 percentage points from May.
It was the third consecutive monthly increase, the seventh rise in nine months and the highest level since March, 1980, when the operating rate was 83.7%.
“We’re in the danger zone,” said David Jones, an economist with Aubrey G. Lanston & Co., a government securities dealer. “We are pushing back up to the levels we saw back at the beginning of the decade when we saw more inflation.”
Jones predicted that by the fall, operating rates would move past 85%, the level economists believe indicates the presence of inflationary production bottlenecks. The concern is that as companies have difficulty meeting demand and their products become more scarce, prices will rise.
Capacity constraints are usual in an economy in its 67th month of expansion, but Jones said the drought in the Farm Belt, a tightening labor market and the recent increase in the value of the dollar are combining to worsen the inflation pressures that would normally be present.
Last month, the drought sent grain and poultry prices soaring by more than 20%; unemployment dropped to a 14-year low of 5.3%, and the dollar rose to its highest level since last fall, a development that could eventually increase import prices.
Federal Reserve Chairman Alan Greenspan, in testimony to Congress last week, warned that the Fed will push interest rates higher, if necessary, to combat inflation. He said unemployment and factory operating rates will have to level off to avoid accelerating price increases.
The June operating rate of 83.1% was 2.8 percentage points higher than a year ago. However, the breakdown by industry in the Federal Reserve report may ease inflation fears somewhat.
“Some of the areas that have been the tightest don’t seem to be getting any worse,” said Cynthia Latta, an economist with Data Resources Inc., a Lexington, Mass., forecasting firm.
