Industrial Capacity at 1980s Peak : U.S. Production, Inventory Levels Also Post Increases
American industry is using more of its capacity than at any other time in nearly a decade, the government said Wednesday in a report that showed operating rates approaching levels that can worsen inflation.
The Federal Reserve Board said January’s operating rate of 84.4% of capacity was unchanged from December, for which the figure was revised upward from an earlier estimate of 84.2%.
The operating rate for January and December has not been surpassed since October, 1979, when factories were functioning at 84.6% of capacity.
“Historically, capacity utilization rates of around 85% are the flash points for a speedup in inflation,” said Robert DeFina, senior economist for Security Pacific National Bank in Los Angeles. “There are signs that things are getting tight, that inflation pressures are building.”
In a related report Wednesday, the Fed said that its industrial production index in January climbed 0.3% following a revised increase of 0.5% in December. January’s increase was paced by a 0.5% rise in manufacturing production.
The Fed’s industrial production index now stands at 141.1% of its 1977 base, 5% higher than a year earlier.
Concern Rising
Economist Michael K. Evans, head of a Washington consulting firm, said the reports show “there’s no sign of a slowdown in the economy” despite the Federal Reserve’s efforts to restrain economic growth and keep inflation in check by pushing up interest rates.
Evans said the “portents are right” for the Fed to push rates even higher, partly as a backlash against President Bush’s comments this week that he would “not like to see” the Fed tighten credit further.
But Richard Rahn, chief economist for the U.S. Chamber of Commerce, said that reports indicate industrial expansion was unnecessarily restrained by the Fed’s tightening.
“Further hiking of the rates will restrict investment in capacity equipment even more and hold down further growth in capacity,” Rahn said.
As use of industrial capacity rises, so does concern that factories will have trouble keeping up with orders, leading to shortages and price increases.
January’s report showed operating rates at manufacturing plants up 0.2 percentage point to 84.8%, while activity at mines and utilities decreased.
Capacity utilization for durable goods--”big ticket” items expected to last more than three years--rose 0.1 percentage point to 83.3%, while the rate for non-durable goods increased 0.3 percentage points to 86.9%.
Even higher operating rates existed in several industries, including primary metals, at 91.6% of capacity; petroleum products, 89.1%; chemicals, 89.2%, and paper products, 94.6%.
Automobile plants, meanwhile, slipped to 75.7% of capacity, down from 79.8% in the previous month. The production report showed autos were assembled at an annual rate of 7.5 million units, down from 7.9 million in December.
Economist Cynthia Latta of Data Resources Inc. in Lexington, Mass., said that while the reports didn’t indicate growth has been so strong the economy will overheat, the capacity utilization figures also “don’t suggest that we can stop worrying about inflation.”
DeFina said the message was that “the economy remained healthy as it entered the new year. It indicates that the things the Fed is worrying about, inflation pressures . . . are still there.”
Consumer prices rose 4.4% last year, identical to the 1987 gain. The first look at consumer prices in the new year will come with the release of January’s report on Feb. 22.
CAPACITY UTILIZATION
Seasonally adjusted percent of total capacity
Source: Federal Reserve Board
Los Angeles Times
BUSINESS INVENTORIES
Number of months of inventory on hand at current sales rate
Source: Commerce Department
Los Angeles Times
