Industrial Production Jumps to Two-Year High
A manufacturing boom pushed factories to their steepest operating levels in two years during March, the Federal Reserve said Wednesday, reviving fears of more interest-rate rises as early as next month.
Separately, the Commerce Department said builders broke ground on fewer new homes and apartments last month than in February but still finished the first quarter with a higher total than in the final three months of last year.
Analysts said a potential leveling off in the housing sector was probably not enough by itself to prevent the central bank from again raising interest rates as early as May 20 in the face of strained factory operating levels to meet vibrant consumer demand.
Total output by the nation’s mines, factories and utilities climbed a stronger-than-expected 0.9% last month, after a revised 0.6% February pickup.
The capacity use rate, which measures how near to production limits businesses are operating, jumped to 84.1% from a revised 83.6% in February--the highest rate since 84.3% in March 1995.
“We’ve certainly moved into an inflationary danger zone,” said economist Anthony Chan of Banc One Investment Advisors Corp. in Columbus, Ohio. An operating rate above 84% signals rising potential for bottlenecks from higher prices for raw materials and bigger wage demands from employees, Chan said.
The industrial production report temporarily ruffled financial markets by suggesting the Federal Reserve Board would raise short-term interest rates several more times through the summer. However, the Dow Jones industrial average closed up 92.71 points to 6,679.87 and bonds were little changed.
In its report, the Commerce Department said construction starts on new homes and apartments fell 6.4% to a seasonally adjusted annual rate of 1.43 million after a revised 10.7% jump in February, when unseasonably mild weather boosted building activity.
In the West, March starts rose 2.5% to 368,000 a year after a 4.4% increase in February.
Costlier mortgage rates, which topped 8% in April for a 30-year loan and are predicted to stay there for the rest of the year, are expected to tamp down housing activity.
Members of the Fed’s policy-setting Federal Open Market Committee decided on March 25 to boost short-term interest rates a quarter percentage point, citing the risk that strong demand could fire up inflation. The FOMC next meets on May 20.
Total manufacturing production jumped 0.9% in both February and March this year, driven primarily by more demand for costly and long-lasting durable goods like household appliances and computers.
