Industries’ Production Increases 1% in December : Economy: Analysts say they fear inflation is surfacing and predict higher interest rates.

At the close of a strong 1994, the nation’s industries were churning out goods more rapidly than they had in two years.

With factories operating closer to capacity than at any time in 15 years, analysts said they fear inflation is bubbling up, and they predicted that higher interest rates are on the way.

“These figures are very strong and tell me the economy is operating in an overheated stage,” said economist Eugene Sherman of the Wall Street firm M.A. Schapiro & Co. “Inflationary pressures are clearly intensifying.”

Production at the nation’s factories, mines and utilities rose 1% in December, the largest increase since the 1% gain of November, 1992, the Federal Reserve Board said. Output was 5.8% higher in December than a year earlier. The growth would have been even more robust if not for a decline in production at utilities, the result of unusually mild weather in the fall and early winter.

The lower electricity output aside, the strength was broadly based. Industry was operating at 85.4% of capacity in December, the highest rate since October, 1979, when it was 85.8%.

The current rate means bottlenecks are likely and that prices will rise, analysts said. They noted that consumers are already paying more for cars and rubber tires.

The latest data contrasts with a government report last week that retail sales declined for the first time in eight months in December. Analysts said the sales dip may signal the beginning of a slowdown in consumer spending that has powered the four-year economic expansion.

There were no signs of any letup in the production figures, however, which were stronger than economists had expected.

“This shows you the economy is still booming but probably is poised for a slowdown,” said Sung Won Sohn of Norwest Corp., a Minneapolis bank. “We could see a buildup of unwanted inventories.”

Analysts said the Fed is likely to raise interest rates again without waiting to see whether the economy really is slowing.

“The Fed will be increasingly concerned about the high levels of capacity utilization in the manufacturing sector and the low rate of unemployment in the labor market,” said Marilyn Schaja of Donaldson, Lufkin & Jenrette Securities Corp. in New York City.

The Fed also said that production rose 0.7% in November, an upward revision from the previous estimate of 0.5%.

Industrial production grew at an annual rate of 5.4% for the fourth quarter, compared to 4.9% for the previous three months.

Factory output, the most closely watched component of the report, rose 1% in December. That matched the November advance; for all of 1994, it was up 6.7%.

The overall operating rate of 85.4% was 0.7% higher than for November and 2.8% above where it was at the close of 1993.

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Industrial Production

Seasonally adjusted index:

1987=100

Dec. 1994: 121.4

Source: Federal Reserve Board