Industrial Output Up--So Is Inflation
Key government reports released Friday showed that inflation continued at a moderate pace, while the nation’s industrial output rose more sharply in May than at any time during the past 11 months.
The reports provided fresh evidence that the recession probably has come to an end. Coupled with other recent reports showing increases in consumer spending and housing starts, economists said they believe that the nation’s economic recovery has begun.
“All across the board, there’s a clear picture of an expanding economy,” said Jerry Jordan, senior vice president and chief economist of First Interstate Bancorp in Los Angeles.
“For the last few months, the No. 1 question has been, when will the recession end? And now that that is gone, everyone is turning their attention to how far will the expansion go and how strong will the recovery be.”
The strongest signal that the economy has begun to grow came Friday from the Federal Reserve, which reported a 0.5% increase in production during May at the nation’s factories and utilities.
The Labor Department, meanwhile, reported that consumer prices rose 0.3% in May, just slightly more than April’s 0.2% increase. In the greater Los Angeles metropolitan area, prices rose just 0.1%, although the smaller local sample is considered less reliable.
With Friday’s figures included, inflation rose at an annual rate of 2.7% during the first five months of this year, compared to a 6.1% increase for all of last year. Economists estimate that 1991 will end with an annual inflation rate of from 3.5% to 4%.
“There is a good chance the recovery will be a mild one, which would make the inflation outlook better than it would be otherwise,” said Dan Laufenberg, a senior economist at IDS Financial Services in Minneapolis.
“What the (price) report shows is that the recovery we are having this time in not significantly different from other recoveries as far as inflation is concerned,” he said.
Although the Labor Department report showed only the slight 0.1% increase in prices for California, the state’s true rate of inflation is probably closer to an annual rate of 4.6%, Jordan said.
“April had a large increase of 0.8%, which was grossly exaggerated,” he said. “Really, the average of those two indicators will tell you what’s going on. Los Angeles-area prices are now up 4.6% over last year, which is less than the national rate.”
Nationally, increases in production were the sharpest for utilities (3.9%), followed by a slight rise in manufacturing (0.2%) and a decrease in mining (0.1%). The report attributed the gains to the renewed use of air conditioners and a slight increase in auto manufacturing.
Meanwhile, energy prices rose 1.4% in May, the first increase in six months, the Labor Department said. Electricity bills rose 1.4%, offsetting decreases of 4.2% in fuel oil and 0.5% for natural gas.
Jordan attributed the higher energy prices to a temporary surge in crude oil prices caused by a supply problem. Gasoline prices rose 2.6% during May, the report showed.
“Energy prices at the retail level will probably move back down now,” he said.
Increased supplies of fresh fruits and vegetables held down food prices, while clothing gained 0.5% because of higher prices for women’s goods. Prices for medical care rose 0.6% in May, up from April’s 0.5% increase.
Consumer Price Index
Percent change from prior month, seasonally adjusted
May, ‘91: +0.3%
April, ‘91: +0.2%
May, ‘90: +0.2% Source: Labor Department
Another Rise in Industrial Production
* Indicator: The May industrial production figures.
* What it did: Production at factories, mines and utilities increased a seasonally adjusted 0.5% in May, the strongest gain in 11 months. Production rose a revised 0.3% rise in April, which was originally reported as up only 0.1%. The two advances ended a six-month string of declines, the longest since the 1981-82 recession.
* What it means: Analysts see the increased production of autos, furniture, appliances and other consumer goods as another sign the recession is ending.
* Highlights: Much of the gain was due to a 3.9% burst of output by utilities after warmer-than-usual weather in the East.
Industrial Production
Seasonally adjusted index, 1987 = 100
May, ‘91: 105.8
April, ‘91: 105.3
May, ‘90: 109.4 Source: Federal Reserve Board
Capacity Utilization Increases Again
* Indicator: The capacity of factories, mines and utilities being used in May.
* What it did: The capacity rate was 78.7%, the second consecutive monthly increase. The rate was 78.5% in April and 78.4% in March, a 7 1/2-year low.
* What it means: Economists said the rebounding production likely will persuade the Federal Reserve that it does not need to lower interest rates again to pull the economy out of recession. However, the low operating rate allows leeway for non-inflationary growth and likely will keep the Fed from nudging interest rates higher, at least until year-end.
* Highlights: The rate at manufacturing plants was 77.3%, while the rate at mines and oil wells was 87.5% and at utilities, 86.1%.
Capacity Utilization
Seasonally adjusted percent of total capacity
May, ‘91: 78.7%
April, ‘91: 78.5%
May, ‘90: 83.4% Source: Federal Reserve Board
