Industrial Production Declines 0.9% in January : Economy: Wholesale prices also fall 0.3%, giving the Federal Reserve the leeway to lower interest rates again.
In renewed signs that the nation’s economy remains fragile, the government reported Friday that industrial production at the nation’s factories skidded 0.9% in January, the third straight monthly decline, while wholesale prices fell 0.3%, the biggest drop in almost a year.
The new figures suggest that inflation is on the wane and manufacturing remains depressed, both indications that the recession has not lifted despite recent glimmers of improvement.
This combination of lower inflation and declining economic activity may provide the Federal Reserve with more flexibility to further cut short-term interest rates without fear of reigniting inflation.
The manufacturing and wholesale figures came a day after the government reported an unexpectedly large 0.6% jump in retail sales last month, which was seen by some as an early indication that a recovery might be under way. Separate reports also showed that sales of North American cars and light trucks surged 23.8% in early February, while the number of laid-off workers filing new claims for unemployment benefits fell for a second straight week.
The contradictory signals create a mixed economic picture and make it difficult for economists to judge just how soon and how strongly the economy will begin to recover.
“It is too early to tell much,” said Charles Schultz, an economist at the Brookings Institution in Washington. “I think the chances are better than 50-50 that we could get a recovery in the spring, but it is hardly a sure shot. And I just don’t think you can put that much stock in early indications like a jump in retail sales.”
The outlook is further complicated by last week’s unemployment report. While the unemployment rate remained unchanged at 7.1% in January, the economy lost 91,000 jobs during the month, an unexpectedly large figure that many economists pointed to as a sign that a recovery is not gaining momentum.
Fed Chairman Alan Greenspan, in public statements before Congress and outside Washington, has said he believes that the central bank has cut interest rates enough for now, but that it stands ready to do more if necessary. This indicates that the Fed apparently believes that it needs more consistent information before taking action.
“It’s a mix, because you can’t snap your fingers and see a recovery,” said Marco Babic, an economist at Evans Economics, a forecasting firm in Washington. “So I think the Fed is waiting to see more data.”
Throughout the recession, which began in mid-1990 and is now the longest in post-World War II history, the Fed’s control over monetary policy and short-term interest rates has been about the only tool available in the government’s effort to turn the economy around. At the same time, the nation’s enormous budget deficit has hampered the ability of the White House and Congress to stimulate the economy by cutting taxes or increasing spending.
Greenspan has been criticized in the past for taking a cautious approach to cutting the interest rate. The Fed last lowered the benchmark discount rate in December, reducing it a full percentage point to 3.5%. The discount rate is what the Fed charges commercial banks for short-term loans.
If the economy again fails to show more definitive signs of a recovery in the coming weeks, the Fed may face increased pressure from the White House to further ease the rates.
The 0.3% decrease in wholesale prices last month followed a 0.1% decline in December and was the biggest drop since last March, according to the Labor Department. It also marked the first back-to-back declines in wholesale prices since last June and July.
Declining energy and food costs were largely responsible for the drop in wholesale prices last month. Gasoline prices fell a steep 7%, and home heating oil costs plunged 16.9%. Food prices fell 0.3%, the third consecutive monthly decline. Excluding food and energy, wholesale prices rose 0.3% in January.
Meanwhile, the 0.9% decline in factory output in January was at least partly because of severe cuts in auto production, according to the Federal Reserve report. But losses were felt throughout the industrial heartland.
The drop in industrial production followed declines of 0.4% in December and 0.3% in November. Industrial production has not shown a monthly gain since last September.
Economic Signals
The Good: No Sign of Inflation: Producer price index for finished goods. Seasonally adjusted change from prior month. Jan., ‘92: -0.3% Dec., ‘91: -0.1% Jan., ‘91: +0.2% Source: Labor Department
The Bad: Industrial Output Plunges: Industrial production, seasonally adjusted index, 1987=100 Jan., ‘92: 106.7 Dec., ‘91: 107.6 Jan., ‘91: 106.6 Source: Federal Reserve Board
