July Production Surges; Analysts Fear Boom May Ignite Inflation

U.S. industrial production shot up 0.8% in July, the biggest increase in nine months, the government said Monday in a report that intensified economists’ worries about rising inflationary pressures.

The Federal Reserve said the large July advance was widespread throughout U.S. manufacturing industries and also reflected heavy demand for electricity during the summer heat wave.

The 0.8% July gain was double the 0.4% June increase and marked the 10th consecutive month that industrial production has risen. It was the largest increase since a 1.1% rise last October.

“The economy has a tremendous head of steam,” said Allen Sinai, chief economist of Boston Co. “It increasingly looks like an old-fashioned boom in the industrial sector, with strong demand and production pressures bringing on inflation.”

Strength Questioned

Many economists had expected a strong July increase because the Labor Department had already reported that manufacturing employment rose by 68,000 jobs in July, the largest increase this year.

“We are seeing an industrial sector that is surging under the impact of increased exports and higher capital spending,” said Jerry Jasinowski, chief economist of the National Assn. of Manufacturers.

But Jasinowski said some of the strength in July was overstated, reflecting the increased electrical demand and some unwanted buildup in inventories.

“People ought not be frightened by these hefty industrial production numbers because the inventory buildup we have been seeing shows that there is still slack in the economy,” he said.

Other analysts said the Federal Reserve would likely read the new figures as further evidence of an overheated economy that needs to be cooled down by additional increases in interest rates.

Tighter Credit Expected

Last week, the central bank boosted its discount rate one-half percentage point to 6.5%. Raising the discount rate, the fee the Federal Reserve charges for lending to commercial banks, is the most dramatic signal the Fed can send of its intent to fight inflation by dampening demand through higher interest rates.

Many economists said they expect further Fed tightening, especially in light of the strong industrial production figures.

“The Fed is facing increasing evidence of more strength than desired in the economy,” said David Jones, an economist with Aubrey G. Lanston & Co., a government securities dealer. “This growth is too rapid at a time when we are nearly fully employed in the labor force and are running up against capacity restraints in many industries.”

The manufacturing sector has been the star of the economy this year as American producers have enjoyed strong foreign sales brought on by a weaker dollar.

The export boom has prompted a related surge in business investment to expand production facilities to meet the rising demand. Reflecting this increase, the industrial production report showed that output of business equipment increased 1% in July, continuing a trend that has pushed output in this sector up 9.7% from a year ago, the fastest increase of any sector.

Consumer Goods Up

The overall July increase came even though auto output actually fell. Autos were assembled at an annual rate of 7.1 million units, down from a pace of 7.5 million units in June. Production of light trucks also decreased during the month.

Production of consumer goods was up 0.3% in July with gains in both appliance production and non-durable goods sectors.

Output of construction supplies fell for the second consecutive month, dropping 0.3% after a 0.1% decline in June. The report blamed a strike in the lumber industry for the weakness.

Overall, output by U.S. manufacturers climbed 0.8% and stands 5.6% higher than a year ago. In July, production of durable goods, items expected to last at least three years, and non-durable goods both rose 0.8%.

Utility production climbed 0.6% after a huge 2.5% June increase, with both months showing heavy demand for air conditioning.

Output at the nation’s mines, including oil- and gas-drilling activities, rose 0.6% in July. This sector is producing at a rate 4.9% higher than a year ago.

Total output stood at 137.7% of its 1977 base of 100.