Production Sees Biggest Drop Since ’90
The faltering economy delivered mixed messages on Friday, with industrial production falling for the 13th consecutive month, the longest streak since the Great Depression, while consumers were buoyed by another decline in the cost of living.
The broad economic slowdown, accelerated by the impact of the terrorist attacks on Sept. 11, resulted in sharp drops in gasoline prices, airline fares and hotel rates in October. The consumer price index fell 0.3%, compared with a rise of 0.4% in the previous month.
Many economists acknowledge the nation is mired in a recession but are optimistic the downturn will be comparatively brief. The fall in manufacturing output is “yesterday’s news,” said Martin Regalia, chief economist at the U.S. Chamber of Commerce, who noted that consumer spending is rebounding strongly, with record sales reported earlier in the week.
Industrial production--the output of the nation’s manufacturing plants and mills--fell by 1.1% last month, the largest decline since November 1990. The manufacturing slump, entering its second year, is the longest since a 15-month period running through July 1932. But the economy is vastly different now, with manufacturing representing a much smaller portion of the economy and with consumers working and spending enthusiastically.
The Federal Reserve Board said the decline in manufacturing was widespread among industries, extending across the board from telecommunications equipment and computers to automobiles to clothing. The October drop followed a 1% decline in September.
The situation in manufacturing is grim, said Tom Palley, assistant director of policy at the AFL-CIO. He said prospects won’t improve until the Federal Reserve and central banks in other countries take steps to drive down the value of the dollar. This would make U.S.-made products cheaper and more attractive to people in other countries.
However, the Fed seems unlikely to make any move in this direction because of its current success in keeping inflation at negligible levels, in part due to a flood of low-priced imported goods.
American factories were working at 74.8% of capacity last month, the lowest level in 18 years, a reflection of the persistent slump in the industrial sector.
With factories operating at a sluggish pace, companies are drawing down inventories, which economists say should pave the way for a strong recovery.
“Declining inventories now suggest a stronger rebound in 2002, but that distant glimmer of hope is insufficient to the present crisis,” said Dave Huether, chief economist at the National Assn. of Manufacturers. “Prior to Sept. 11, much of the world economy was slowing, and recent indications are that we may be entering the first global systematic downturn in three decades.”
But his pessimistic view is not shared by many economists outside the manufacturing sector.
For example, Wells Fargo & Co., the giant banking firm with many customers in Silicon Valley and other high-technology precincts, foresees a V-shaped recession, a sharp downturn with a very quick rebound. The recovery should come in the first quarter of 2002 “and certainly by next spring,” said Sung Won Sohn, the chief economist at Wells Fargo.
“Consumers are feeling better, and they should,” he said. “The war on terrorism is going well, and they will have more buying power from the tax cuts and from lower energy prices,” he said.
The consumer price index report showed a 6.3 % decline in energy prices, the biggest drop in more than 15 years. Gasoline prices plunged 10.7%. With airlines trying to win nervous travelers back after Sept. 11, airline prices dropped 2.5% last month.
The decline in energy prices will have a substantial impact, giving consumers an additional $150 billion in buying power, according to Sohn. The average price of a gallon of gasoline nationwide is $1.18, down 34 cents compared with the same time last year.
The core rate of inflation, considered the best measure of trends in the cost of living, excludes food and energy costs, which tend to be volatile. The core rate rose a modest 0.2% in October.
For the first 10 months of the year, inflation has climbed at an annual rate of 2.1%, a significant improvement from last year’s figure of 3.4%.
With no signs of price acceleration on the horizon, the Fed still has freedom to maneuver in its policy, able to lower interest rates yet again to try to stimulate business activity.
