Factory Production Up 2nd Straight Month

U.S. industries increased production for a second straight month in May and businesses showed signs of rebuilding depleted inventories, a move that could mean even greater output and more jobs.

The Federal Reserve Board said Friday that output at the nation’s factories, mines and utilities rose 0.7% in May after an identical advance a month earlier. The April rate was revised down from 0.9%, however.

At the same time, the Commerce Department reported that business inventories rose 0.4% in April after shrinking 0.3% the previous month.

“The economy clearly has rebounded from its weakness last year,” said economist Gary Thayer of A.G. Edwards & Sons Inc., a St. Louis stock brokerage.

Richard Berner, an economist at Mellon Bank in Pittsburgh, agreed, although he said he expects economic growth to slow from a 4% annual rate this quarter to about 3% in the next.

Separately, a key reading of consumer sentiment found Americans to be more optimistic about their finances and economic prospects this month. The University of Michigan said its preliminary index of consumer sentiment for June rose to 93.8 from 89.4 in May.

“The manufacturing sector is back on a growth track after dragging along the bottom,” said Robert Dederick, an economic consultant at Chicago’s Northern Trust Co. “The economy is firing on all cylinders. The Fed is going to have to be on an inflation watch.”

Unlike other recent reports highlighting strength in the economy, though, Friday’s economic indicators didn’t spook bond investors. That’s due in part to April’s gain in industrial production being revised down from an estimated 0.9%--as well as relief that the May number wasn’t larger.

The Treasury’s benchmark 30-year bond erased an early morning loss after the industrial production report was released and rose 17/32 in late trading. That pushed down the yield to 7.03%. Stocks were lower, with the Dow Jones industrial average falling 8.50 points to close at 5,649.45. The dollar was up against most other major currencies.

Analysts said it appeared the inventory growth was intended, based on an anticipated increase in demand.

“We had several quarters of inventory correction and we are now at the point where the economy is doing better and businesses are feeling comfortable holding bigger stockpiles,” Thayer said.

The Fed report also showed that the nation’s industries were operating at 83.2% of capacity in April, up from 82.9% a month earlier and 82.6% in February.

But Elliott Platt, an economist with Donaldson, Lufkin & Jenrette Securities Corp. in New York, contended that “despite the increase, capacity utilization remains a safe distance from any rate that may create manufacturing bottlenecks and ignite inflation.”

The Fed said industrial production was led in May by gains in utilities, business equipment and durable goods.