Production Falls to 18-Year Low
The nation’s factories slowed last month to their most sluggish pace in nearly 18 years, reflecting a broad manufacturing downturn and raising deeper concerns about the health of the U.S. economy.
Figures from the Federal Reserve on Friday showed that the portion of the nation’s industrial capacity being put to use fell to 77.4% in May. That’s the lowest mark since it stood at 77% in August 1983, during the Reagan administration.
In a related report, the Fed said production at U.S. factories, utilities and mines fell 0.8% in May, more than twice the decline expected by many analysts. It marked the eighth consecutive month that industrial production has fallen.
Economists said the Fed’s statistics, coming amid heavy job-cutting in high-tech and other manufacturing fields, provide fresh evidence that industries are slashing production because of weak business orders.
During the last 12 months, the nation’s manufacturing sector has eliminated 614,000 jobs. Another major retrenchment was announced Friday by Nortel Networks Corp., the world’s leading phone equipment maker. The company said it cut 10,000 jobs, many of them in the United States, adding to the 20,000 positions Nortel already said it would cut earlier this year.
Analysts said the economic news also suggests that Fed policymakers, when they next meet, June 26-27, will cut short-term interest rates either a quarter or a half of a percentage point. It would be the sixth rate cut this year as the central bank tries to prevent the economy from tipping into recession.
On the news, the Dow Jones industrial average fell 66.49 points to close at 10,623.64, while the Nasdaq composite index slipped 15.64 points to finish at 2,028.43.
“We’re at the worst point in this economic cycle,” said Sung Won Sohn, the Minneapolis-based chief economist of Wells Fargo & Co.
Sohn said the manufacturing sector “is getting into a deeper recession. Worse yet, it’s spreading to the rest of the economy, including services.”
Still, Sohn and other economists said they expect the U.S. economy to recover later this year. They cited the effect of the Fed’s aggressive interest rate cuts, the recently passed federal tax cuts and business inventory reductions that may head off the need for further production cutbacks.
While most manufacturing sectors were hit, autos and truck production defied the pattern as companies have offered consumers steep discounts.
The auto industry has “gone a long way in reducing inventory, and it is back in the game of producing,” said Greg Mount, an economist at Bank One in Chicago. “This may be the beginning of the turnaround of all of manufacturing.”
Mount also argued that consumer spending is likely to bounce back, pulling the economy out of its recent doldrums.
Still, other economic reports Friday yielded widely varying opinions on how much consumers will sway the economy in coming months.
For instance, the University of Michigan’s mid-June index of consumer sentiment reportedly showed little change. It slipped to 91.6, versus 92 at the end of May. It suggested to some analysts that consumer confidence is stabilizing, while others expressed concern that confidence remains too low.
Meanwhile, the U.S. Labor Department reported that the overall consumer price index rose 0.4% in May, the biggest gain since January. The gain would have been a scant 0.1% if it hadn’t been for rising energy costs, which often are volatile.
To some analysts, the price report indicated that inflation remains tame. As a result, they say, consumers will continue to spend and the Fed will have the flexibility to cut interest rates further without fear of overheating the economy.
Skeptics, however, countered that the price discounts on autos, computers and other goods that have held down inflation so far are unlikely to continue. Likewise, even if energy prices level off, cost increases that already have taken place “are money out of consumers’ pockets,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal Washington think tank.
One key reason for Friday’s weak figures on the use of production capacity is that overall industrial capacity expanded dramatically during the last decade. Companies boosted their industrial potential by investing heavily in new computers and software, along with plants and equipment.
As such, even though production capacity figures are back to where they stood in 1983, the nation’s output today is far greater. Capacity has grown more than 75% since 1983.
For manufacturing workers, though, the productivity improvements aren’t always good news. Some of the new technology has meant that companies can do more with fewer workers.
High-tech industries continue to take the brunt of the production cutbacks. The Fed said capacity utilization in high-tech dropped in May for the 10th month in a row, to 70.3%, the lowest rate in 25 years.
That’s a reversal from last year’s speedy growth in such fields as semiconductors, and it means trouble for areas such as California’s Silicon Valley.
“The Internet rush is over,” said Edward E. Leamer, director of the UCLA Anderson Business Forecast. “With the tech bust, there’s no locomotive pulling the economy along.”
