Production, home starts post gains Stock market slumps on fears that growth might spur inflation

'A lot of momentum'

Industrial output increases 0.7% for 3rd straight uptick

October 18, 1997|By BLOOMBERG NEWS

WASHINGTON -- The U.S. economy continued to forge ahead in September with industrial production and starts of new housing construction posting unexpectedly strong gains, figures showed yesterday.

Stocks slumped on fears that still-strong growth could reignite inflation. "The economy has a lot of momentum," said economist William Sullivan of Dean Witter Securities in New York.

Industrial production jumped 0.7 percent last month for the third straight increase, Federal Reserve figures showed, led by output of utilities, light trucks, computers and commercial aircraft. The plant-use rate -- which measures the amount of industrial muscle in use -- soared to the highest level since early 1995. That's bound to catch the eye of Fed Chairman Alan Greenspan and his colleagues, who are concerned that strains in capacity could lead to higher industrial and consumer prices.

Housing starts rose by 7.9 percent in September, the Commerce Department said, a reflection of low mortgage rates and high levels of consumer confidence. September's increase in housing starts reversed declines of 5.1 percent in August and 2.5 percent in July.

The economy probably grew at a "pretty doggone healthy" 4.0 percent pace during the third quarter, which ended Sept. 30, said Raymond Worseck, chief economist at A.G. Edwards & Sons, a St. Louis-based brokerage.

Growth in the current fourth quarter will likely run at a cooler 3.0 percent, Worseck said, though that, too, exceeds the Fed's noninflationary growth target of about 2.5 percent.

In financial markets, the Dow Jones industrial average fell 91.85 points to 7,847.03, halving a 182-point loss.

Even so, a Labor Department report released yesterday suggested that prices of U.S. imports fell for the fourth straight month in September.

Before the industrial production report from the Fed, analysts expected a 0.3 percent gain for September. Production rose a revised 0.5 percent in August, previously reported as a 0.7 gain. July output was revised higher to a gain of 0.8 percent from a rise of 0.4 percent.

For Fed officials, the rising plant-use rate could be taken as a sign production costs are poised to rise as manufacturers press less-efficient equipment and plants into service. That "gets back to Greenspan's theme before Congress that the Fed needs to remain vigilant and quick to respond to any inflationary pressure," Sullivan said.

Atlanta Federal Reserve Bank President Jack Guynn endorsed the Fed's willingness to move against inflationary pressures before they are evident in the economy. "Much of our good economic performance has come not from dumb luck but from our willingness to make tough policy decisions," Guynn said in a speech yesterday in Tallahassee, Fla.

Output at the nation's utilities surged 4.4 percent from August as demand for electricity rebounded after "unusually cool weather held down the need for air conditioning" the previous month, the Fed said. Excluding utilities, industrial output rose 0.4 percent in September, a Fed spokesman said.

By category, manufacturing output advanced 0.4 percent last month. Auto and truck production increased 2.3 percent. Household appliance production fell 3.0 percent. Meanwhile, the percent rise in September construction starts -- almost double the gain analysts expected -- pushed the seasonally adjusted annual rate of 1.500 million, just shy of the June level of 1.503 million, Commerce Department figures showed. Building activity picked up in all regions. Permits for new housing construction, a gauge of future demand, rose 3.4 percent in September.

Pub Date: 10/18/97

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