Dec. output in factories put at 85.4%

January 18, 1995|By New York Times News Service

WASHINGTON -- U.S. industry ran at its fastest pace in 15 years last month as an unexpectedly strong burst of year-end activity pushed capacity utilization to 85.4 percent, the Federal Reserve reported yesterday.

With output of the nation's factories, mines and utilities rising 1 percent, the biggest gain in two years, many analysts said the industrial sector now had such potential for reigniting inflation that the central bank could not avoid further increases in short-term interest rates.

Additional monetary tightening has been widely assumed since the preceding rate increase Nov. 15, but some analysts had come to think that Mexico's economic crisis and then a report on Friday of flat retail sales for the final two months of the year might cause the Fed to stay its hand.

Higher U.S. interest rates could make the already battered peso even less attractive relative to the dollar.

Paul W. Boltz, a former Fed staff economist who is now a vice president at T. Rowe Price Associates, called yesterday's figures "a matter of serious concern" and said it would be "worrisome" if the Fed did not act.

"The economy has a big head of steam up," Mr. Boltz said. "At least the production side of the economy was booming" as 1994 ended.

The Fed's Open Market Committee, its policy-making arm, is scheduled to meet for two days beginning Jan. 31.

"The Fed will be increasingly concerned about the high levels of capacity utilization in the manufacturing sector and the low rate of unemployment in the labor market," Marilyn Schaja, an economist at Donaldson, Lufkin & Jenrette, said in a report to clients yesterday.

For manufacturing alone, output rose 1 percent last month to lift the 1994 gain to 6.7 percent, the Fed's report showed. Mining surged 1.2 percent after two straight declines, while the nation's utilities continued to reflect exceptionally warm weather as production fell eight-tenths of 1 percent.

Industrial production expanded at an annual pace of 5.4 percent in the October-December quarter, up from a pace of 4.9 percent in the July-September quarter.

The Fed has raised short-term rates six times since last February. It is known to pay particular attention to the utilization rate, which it calculates itself and which has now surpassed the 85 percent threshold that is often associated with accelerating price pressures.

Some analysts, while not necessarily contending that a rate rise can be avoided, expressed reservations about the figures, particularly the operating rate.

"I have deep skepticism about the validity of them as predictors of inflation," said David H. Resler, chief economist at Nomura Securities International in New York.

He noted that the three most recent occasions in which utilization reached about 85 percent -- in 1980, in the late 1980s and now -- have been times of widely varied inflation: about 12.5 percent, 4.5 percent and 2.5 percent, respectively.

The 85.4 percent operating rate last month, which was the highest since October 1979, compared with 84.7 in November and 84.3 in October. The utilization rate for primary-processing industries jumped seven-tenths of a point, to 90 percent.

Jerry Jasinowski, president of the National Association of Manufacturers, said the "most significant" aspect of the rise in output last month was the fact that it was broadly based to include both business equipment -- up nearly 10 percent for the year -- and automobiles and other consumer goods.

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