Industrial Production Report Suggests Slow Economic Growth
A scant rise in industrial production added to mounting evidence that the economy is growing at a moderate pace that may keep the Federal Reserve Board from raising interest rates next week.
The latest numbers suggest the economy is expanding slowly enough to avoid a burst of inflation without the Fed’s taking action.
In fact, Thursday’s report on industrial production, which rose 0.1% in July because of higher automobile output, contained no sign of inflation. It said the nation’s industries were operating at 83.2% of capacity, down from 83.4% a month earlier.
Economists contend that capacity utilization of 85% or more threatens production bottlenecks that could lead to shortages and higher prices.
“After rising a strong 6.2% annual rate in the second quarter, it appears that momentum in the manufacturing sector has slowed,” said Cheryl Katz, an economist at Merrill Lynch & Co.
Industrial production would have slipped 0.1% if not for the 4.3% gain in motor vehicles. Economists had been expecting a drop of 0.2%.
Bond prices dropped modestly and stocks were slightly higher in reaction to the numbers. Although the number was a bit of a surprise, the markets have largely settled into a conviction that the Fed won’t change its rate policy next week and raise them, that it will need more evidence of rapid growth before sentiments change.
Figures on July housing starts are due today and the June numbers on trade are scheduled for Tuesday morning, when the policymaking Federal Open Market Committee begins meeting.
“They are going to stand pat and wait for more evidence,” economist Sung Won Sohn of Norwest Corp. in Minnesota said. “I think a hike or two later this year should not be ruled out, however.”
A separate report released by the Labor Department on Thursday was interpreted by some analysts as depicting a strengthening labor market. It said new claims for jobless benefits rose by 5,000 to 321,000, well below the 370,000 just six weeks ago. The closely watched four-week moving average, which smooths out the spikes in the volatile weekly data, dropped by 11,500 to 313,000, a seven-year low.
“It’s another sign this economy has more life than has been suggested” by recent data, said economist Lynn Reaser of Barnett Banks Inc. in Jacksonville, Fla. She also cited reports that retail sales have picked up since the Olympics as consumers turned off their TVs and headed to stores for back-to-school supplies.
Economists attributed the increase in motor vehicle output to auto makers’ preparing for a possible strike this fall and to continued consumer demand on the eve of the new model year.
Also showing some strength was the computer industry, which posted a 1.7% increase in production. But “output in other categories was unchanged, on balance,” the report said.
The Fed also said utility output fell 1.8% in July as consumers turned down their air conditioners because of cooler-than-normal temperatures in the East. Utility output had declined 1.5% in June.
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Industrial Production
Seasonally adjusted index, 1987=100
1996: 126.2
Source: Federal Reserve Board
