Factory Use Rate Declines; Inventories Up

The strain on U.S. industrial capacity eased in September for the first time in seven months as utilities scaled back after the summer heat wave, the government said Monday.

In a separate report, the Commerce Department reported that business inventories continued their steady rise in August, but economists remain untroubled because the expansion is not outpacing strong sales.

The Federal Reserve Board said the overall operating rate last month at U.S. factories, mines and utilities fell to 83.6% of capacity, down 0.2 percentage points from August.

In July, the rate also was 83.8%, soaring to an eight-year high from 83.0% in June as utilities produced more electricity to run air conditioners.

Utility operating rates fell from 83.6% in August to 79.9% last month, while electric utilities fell from 88.1% to 83.5%.

Inflationary Forces Remain

“Utilities had their big surge in July and August and then they came back to normal,” said Robert G. Dederick, an economist with Northern Trust Co. in Chicago.

“The relevant thing is what went on in the manufacturing sector. . . . There, I think we can say the pressure on resources hasn’t worsened, but it still remains relatively high and therefore any easing of inflation pressures is unlikely,” he said.

The operating rate at manufacturing plants held steady at 83.8%, the same as August and down slightly from 83.9% in July, the most recent peak.

Economists have expressed concern that high factory operating rates and a tight labor market are exerting inflationary pressure on the economy. If overall operating rates get too high, overworked factories can have trouble meeting demand, leading to higher prices.

Capacity use at manufacturers of durable goods, “big ticket” items expected to last three or more years, edged up 0.1 percentage points to 82.4% while the rate for non-durable goods edged down by the same amount to 85.8%.

The largest increase came at auto assembly plants, where the operating rate rose 3.6 percentage points to 74.0%.

“The overall level of capacity utilization doesn’t signal as much price pressure as it might because the hot industries are cooling and the cool industries are speeding up,” said John Hagens, an economist for the Wefa Group, a Bala-Cynwyd, Pa., forecasting firm.

In its inventories report, the Commerce Department said goods held on shelves and back lots rose 0.8% to $733.7 billion, following a 0.7% gain in July. It was the 20th consecutive monthly increase.

Rising inventories can be a sign of economic sluggishness as manufacturers order production cuts and layoffs while goods in reserve are sold off.

August Sales Up

However, analysts are not particularly troubled by current inventory levels because sales also have been strong.