Reports Show Modest Growth for Economy
U.S. factories stepped up production last month at their fastest rate in more than eight years, sharply recovering from a blizzard-induced slump, while inflation remained a virtual no-show, according to government economic reports released Friday.
Taken together, the reports indicate that the economy may be springing back to life at a pace that will mark out a middle ground between an election-year slump on the one hand and higher inflation on the other. They also support growing sentiment that the Federal Reserve will not cut interest rates any time soon.
“Clearly the economy is not booming,” said Lynn Reaser, chief economist at First Interstate Bank. “We’ll see much smaller [growth] numbers going forward. But we’re not slipping into recession either.”
That could be welcome news for President Clinton, whose reelection chances might be enhanced if a popular impression persists into the summer that the economy is modestly expanding.
Among other figures released Friday, the Fed said overall industrial production jumped 1.2% in February after a drop of 0.4% in January.
Meanwhile, retail prices of goods and services--the so-called consumer price index--rose only 0.2% in February, according to the Labor Department. That was half January’s rate. For the 12 months ended in February consumer prices rose 2.7%, about the same rate as in the previous 24 months.
Separately, the University of Michigan’s widely watched indexof consumer confidence surged to 95.7 in March from 88.5 last month, suggesting that consumer spending may gain vigor in coming months.
The statistics tend to validate last week’s government report of a huge gain in nonfarm jobs in February. Although many economists still believe that report of a surge of 705,000 new jobs was skewed by seasonal and onetime factors, Friday’s numbers further indicate that the economy is trending upward.
The statistics also suggested that Federal Reserve policymakers will vote to hold short-term interest rates steady for at least another month when they meet March 26.
“You can kiss any March rate cut goodbye if you hadn’t done so already,” said Cynthia Latta, an economist at DRI/McGraw-Hill in Lexington, Mass.
Some experts even think that the Fed might soon reverse course, raising short-term rates to keep the economy from overheating.
“The consumer sentiment report was really a surprise,” said Waldo Best, senior economist at Barclays de Zoete Wedd Securities Inc. If the consumer sentiment index is validated by a strong retail sales report next Wednesday, he said, “that would be the last straw for the Fed tightening.”
For their part, Fed governors took pains Friday to reinforce the impression that the current scale of economic growth is healthy and that popular fears of a looming recession and a shrinkage in job opportunities are overstated.
“There’s a lot of misery going around,” remarked Robert D. McTeer Jr., president of the Dallas Federal Reserve, in a Texas speech. “A lot of that is exaggerated, though not all of it.”
“Pessimism about the economy is a little bit overdone,” Fed Governor Janet Yellen echoed in an interview with the Bloomberg News Service, adding that she considered the economy poised to “bounce back.”
Latta and other private economists noted not only that the Fed may be wary of overheating a recovering economy by loosening credit too quickly. They also pointed out that Friday’s economic figures encompass periods of strikes and severe winter weather that make their full significance hard to gauge.
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The receding prospects of a Fed rate cut sent interest rates higher, with the yield on the 30-year Treasury bond rising to 6.73% from 6.69%, its highest level in nearly seven months.
In announcing Friday that industrial production surged 1.2% in February from the month before--the sharpest increase since October 1987--the Fed noted that fully one-third of the increase was accounted for by the settlement of a strike at the aircraft-making Boeing Co. in mid-December.
The Fed also noted that January’s factory output figures had been depressed by the blizzard that struck the East Coast in early January.
Similar disruptions are likely to continue clouding the crystal ball for economic policymakers in the months ahead. Next month’s figures, for instance, will be affected by a strike at two General Motors Corp. brake plants that is bringing GM’s auto production to a halt nationwide.
Nevertheless, the statistics tended to paint a portrait of an economy growing much more strongly than it had through most of 1995--and much more strongly than forecasters had expected. The economy grew by 2.1% last year, its weakest showing since 1991.
That may mean that manufacturers have finally worked through excess inventory that accumulated during last year’s period of slow growth and could be ready to step up production even more.
“It appears that the inventory correction of 1995 has been completed,” said First Interstate’s Reaser.
The Fed’s numbers showed sharp growth in virtually every area of industrial production, leaving out only utilities, which were slowed by the return of mild weather.
Times wire services contributed to this story.
* RISING RATES
Bond yields rise on report. D1
