Factory Capacity Rate Surges to 8 1/2-Year High

The operating rate at U.S. factories, mines and utilities in October rose to the highest level in 8 1/2 years, the government said Wednesday in a report that stirred new concern about inflation.

The Federal Reserve Board said American industry used 84% of its capacity last month, up from 83.8% in September. It was the largest increase since July and the highest level since February, 1980.

Capacity use has grown or held steady for eight consecutive months, creeping ever closer to the 85% threshold that economists believe signals a pickup in inflation.

As capacity increases, factories can have trouble producing enough goods to meet demand, leading to shortages and higher prices.

“The hike . . . is yet another sign of an increasingly fully employed economy where substantial inflationary pressure is building,” said Allen Sinai, chief economist of Boston Co.

Although American businesses have spent heavily this year on new equipment to expand production, Sinai said, “increased capacity is slow to come on line.”

The rise in the operating rate last month followed a month of no change in September, a 0.1 percentage point gain in August and a sharp 0.7 percentage point rise in July.

At manufacturing plants, the operating rate rose to 84.3% last month, up from 84.1% in September and the highest since July, 1979. All of that increase was attributable to producers of durable goods, “big ticket” items intended to last three or more years.

The durable goods rate jumped from 82.6% to 83%, while the rate for non-durable goods held steady at 86.2%.

The rate at motor vehicle and parts plants shot up for the third month in a row, hitting 84.4% last month, up from 82.6% in September, the highest since 1985. However, the Federal Reserve said the rate was still well below the 93.3% peak reached in 1978.

John Hagens, an economist with WEFA Group, a Bala-Cynwyd, Pa., forecasting firm, said he saw “some small sign of optimism” in the capacity report because the growth came in industries with more room to expand.

“The mix is in the right direction, away from non-durables and toward the durables,” he said. “It’s a high number, but it’s not as high as it’s been at the end of previous expansions.”

The operating rate at utilities was 80.8% last month, up from 80.6% in September. It hit a peak for the year in August of 83.9% because of a surge in electricity use during the summer heat wave.

In the mining sector, which includes oil and gas drilling, the operating rate slipped from 82.4% in September to 81.8% in October. U.S. oil drilling activity has waned in response to a decline in world oil prices.

Business inventories rise sharply. Story, Page 8.