Good News on Housing, Industrial Output, Trade : Economy: An increase in home construction and production gains are seen as signs that the nation's recovery is on track.

By ROBERT L. JACKSON

June 17, 1992 12 AM PT

TIMES STAFF WRITER

WASHINGTON —

In two encouraging economic signs, new home construction rebounded sharply in May after a steep decline a month earlier, and output from the nation’s factories, mines and utilities showed the largest gains in nearly a year, the government said Tuesday.

Another indication that an economic recovery, although still shaky, is on track, came from Commerce Department figures showing that the nation’s first-quarter trade gap narrowed, recording the best trade performance since early last year.

Meanwhile, Federal Reserve Board Chairman Alan Greenspan told Congress that the United States is making advances against inflation and that further gains are expected.

“The U.S. economy has made considerable progress toward price stability over the past decade, trimming the core rate of inflation to below 4%, and it appears poised to make further advances,” Greenspan testified before a subcommittee of the House Committee on Government Operations.

The Fed chairman said the low level of inflation may allow long-term interest rates to come down, providing another boost to economic growth.

A 11% surge in housing starts last month represented only a partial recovery from the huge 17.3% decline in April. But economists called the increase heartening because it was spread across all regions and was the largest gain since a 19% increase in February, 1991. The May increase put residential construction starts at 25% above the rate a year ago.

A rebound in housing is considered crucial for sustained recovery because it signals consumers’ intentions to make long-term financial commitments. However, the National Assn. of Home Builders said it viewed the upswing “with great relief but not with real enthusiasm.”

“I don’t think at this stage of the recovery housing can be an engine of growth, although we certainly hope to be a positive contributor,” said Dave Seiders, an association economist.

The Federal Reserve said industrial production rose 0.6% in May, the biggest gain since a rise of 0.7% in July, 1991, and a further sign that the industrial sector of the economy is continuing a slow rebound.

It was the fourth consecutive month that this barometer has risen, coming on the heels of 0.5% gains in both February and March and a 0.4% advance in April. Industrial production last increased for four straight months from April through July, 1991.

A surge in the production of automobiles and related materials helped fuel the May advance. Factory utilization was also up in May, with the Fed reporting that the industrial sector was running at 79% of capacity, the highest since a 79.3% level in November, 1991.

In individual sectors, auto makers operated at 74.5% of capacity, a big jump from their 70.9% rate in April and up from 63.5% a year ago. The automobile industry has been reducing excess capacity to cut its huge losses last year.

The petroleum industry operated at 91% of capacity in May as refineries stepped up production to supply gasoline for the heavy summer driving season, the government reported.

Economists said that the overall figures indicate that the economy has reached a comfortable rate of growth that seems sustainable and that the production figures are likely to encourage the Fed not to make any dramatic changes in its monetary policy.

Peter Greenbaum, an economist at Smith Barney, Harris Upham & Co., said the Fed will probably steer a steady course because “manufacturing is still moving ahead, not stalling out.”

Greenspan, in his congressional testimony, said the Fed “retains responsibility for long-run price stability and fully intends to guard against reigniting inflation.”

The narrowing of the trade deficit to $5.3 billion in the first quarter was helped by lower oil prices, increased travel to the United States by foreign tourists and improved earnings by U.S. banks on their overseas operations.

Housing Starts

Seasonally adjusted annual rate, millions of units

May, ‘92: 1.23

April, ‘92: 1.11

May, ‘91: 0.98

Source: Commerce Department

Capacity Utilization

Seasonally adjusted percent of total capacity

May, ‘92: 79%

April, ‘92: 78.7%

May, ‘91: 79.1%

Source: Federal Reserve Board