As output rises, rates may follow

August 16, 1994|By New York Times News Service

WASHINGTON -- Despite lower output of motor vehicles and electricity, American industry raised production for the 14th consecutive month in July, Federal Reserve statistics showed yesterday.

Yesterday's report and one due out today on July housing starts will be the final pieces of national economic data before the Federal Reserve's chief policy-making body, the Federal Open Market Committee, meets today to weigh the evidence for further increases in short-term interest rates.

Most analysts expect the Fed to increase the federal funds rate, the overnight rate for loans between banks, by either a quarter-point or a half-point.

The report on industrial production, though a bit stronger than expected, was thought to have made little difference in the Fed's thinking.

"Slack in the economy is limited," said Paul W. Boltz, an economist with T. Rowe Price, the Baltimore investment firm.

Overall production rose two-tenths of 1 percent last month, but output at the nation's factories climbed four-tenths of 1 percent, the most since April. Much of the rise was in machinery, industrial instruments, furniture and fixtures.

Declines in motor vehicles and parts have cut into factory gains for five consecutive months, said a report by Laurence H. Meyer & Associates of St. Louis, but "other sectors have taken up the slack."

Output at both mines and utilities fell markedly last month, with electric power and related coal production returning to more normal levels following exceptionally hot June weather, which swelled the use of air conditioning. Coal is the biggest fuel source for electric plants.

Other restraining forces were a strike at what the Fed described as a leading maker of construction and mining equipment, apparently Caterpillar Inc., and continued weakness in the aircraft industry.

The nation's industry operated at 83.9 percent of capacity last month, the same as in June. A one-tenth of a point rise in manufacturing -- to the same 83.1 percent level as prevailed in April and May -- was offset by slackened operating rates at mines and utilities.

Utilization in primary processing industries -- the Fed cited textiles, lumber, petroleum products and iron and steel -- remained well above their averages for 1967 to 1993. Industries using advanced processes were generally less stretched.

All in all, "production's moving along at a pretty good clip," said Darwin L. Beck, an economist at First Boston and once a Federal Reserve staff member, who said he expected the central bank to raise rates today for the fifth time this year.

He and others said the size of the increase would apparently depend on the Fed's assessment of the other side of the equation: whether goods would continue to attract buyers, especially consumers feeling the effects of earlier rate increases.

Production of construction supplies has now fallen for two consecutive months because of a decrease in demand for housing. Automotive output fell 1.3 percent in July following even bigger declines in April and May and a negligible uptick in June.

Assembly of cars was at an annual rate of 6 million in July, down from 6.2 million in June, while truck production eased to 5.2 million from 5.3 million, according to the Fed's report.

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