Industrial Production Rises in July : Economy: Fed goes into policy meeting with information that could lead to further rate hike.
The 14th consecutive monthly increase in production at the nation’s factories, mines and utilities offered Federal Reserve Board policy-makers a last bit of evidence Monday to justify pushing interest rates higher.
“It gives the Fed . . . a little nudge” a day before today’s policy meeting, said economist Laurence H. Meyer, a St. Louis consultant.
The Fed’s industrial production index rose a modest 0.2% in July, following a robust 0.5% gain the month before. The gain was stronger than predicted and would have been twice as large if not for a decline in electricity generation from an unusually high level in June and a strike at heavy equipment manufacturer Caterpillar Inc.
Meyer and other analysts expect the central bank’s policy-setting Federal Open Market Committee, meeting today, to view the report as another reason to implement a fifth increase in short-term interest rates this year.
Between February and May, the committee raised the rate that banks charge each other for overnight loans to 4.25% from 3%. It will probably increase the rate by at least a quarter of a percentage point and perhaps by half a point, analysts said.
“The Fed is determined to demonstrate its zeal as an inflation fighter,” said economist Sandra Shaber of the WEFA Group in Bala Cynwyd, Pa.
She anticipated the rate increase even though inflation appears under control. Through July, consumer prices rose at a rate that, if continued, would match last year’s 2.7%.
The Fed, analysts said, is trying to keep the economy from overheating before inflation starts to accelerate. In so doing, it hopes to restrain the rise in long-term interest rates, such as mortgage rates, which are set in financial markets rather than by the Fed directly.
Industrial plants in July operated at 83.9% of capacity, the same as last month but up from 81.3% a year earlier and only nine-tenths of a percentage point below the pre-recession peak reached in 1989.
Operating rates were particularly high for industries manufacturing materials used in a wide variety of goods: primary metals such as steel, 92.2%; paper products, 92.7%, and petroleum products, 93.4%.
In July, production rose 0.4% at factories after edging 0.1% higher in June. It fell 0.9% at mines and oil wells after a 0.3% increase. And it dropped 1.2% at utilities after soaring 5.2% the month before.
Production of consumer goods rose 0.4% despite a 2.3% drop in the output of autos and trucks. Production of appliances, televisions and other durable goods designed to last three or more years was strong.
Although held back by continuing weakness in aircraft manufacturing, business equipment production advanced 0.5%, led by information-processing equipment.
The Fed’s overall industrial production index was 5.6% higher than a year earlier. Among factories alone, it was up 6.3%.
Seasonally adjusted percent of total capacity:
July 1994: 83.9%
Source: Federal Reserve board
Seasonally adjusted index:
July 1994: 117.2
Source: Federal Reserve board