Fed report shows economic growth

April 15, 2006|By JAMES P. MILLER | JAMES P. MILLER,CHICAGO TRIBUNE

U.S. industrial output climbed a solid 0.6 percent in March, the Federal Reserve said yesterday in a report that offered the latest proof that the economy is still gaining momentum.

The report also revealed that the nation's factories operated last month at their highest capacity level in more than five years. That performance served to underscore the growing strength of the industrial sector - but also fueled concerns that surging demand for production resources is approaching a point where inflation could pose a significant threat.

If the economy begins to show signs of overheating, many experts think the Fed is likely to continue increasing rates beyond the one or two more increases investors have been expecting, in order to dampen inflationary pressures.

"By any reckoning, these are robust" results, ClearView Economics economist Ken Mayland said of the March production numbers."The industrial economy has much going for it now," he said.

But the very strength of the production upturn - coming after unexpectedly positive news on consumer spending and the trade deficit early this week - caused unease among some experts.

Yesterday's report suggests that "If the Fed was looking to slow the economy to take pressure off of inflation they have not succeeded," said Joel L. Naroff, of Naroff Economic Advisors. "This economy is churning along. But resources, including labor, commodities and to a lesser extent industrial capacity, are being stretched."

The so-called "IP" report measures the output of the nation's mines, factories and utilities. And while the report can on occasion be skewed by unusual factors, the March data showed unmistakeable, broad-based improvement in the industrial sector.

The 0.6 rise recorded in March was stronger than February's downward-revised 0.5 percent increase, and also exceeeded the 0.5 percent economists had been anticipating for March.

For the first quarter, industrial production rose at a hefty annual rate of 5.4 percent.

The Fed's production report also measures how much capacity America's industrial sector is using. Capacity utilization rose to 81.3 percent, from a revised 81.0 percent rate in February; that's the highest level since September, 2000, when U.S. manufacturing began to slip towards recession.

Experts remain divided over what that means for the economy. Historically, as capacity use increases, producers gain more pricing power over their customers, and raise prices. As business becomes more global, however, companies can produce at sites worldwide, and the link between U.S. utilization rates and inflationary pressures has become less ironclad than it once was.

Mayland emphasized yesterday that capacity utilization "is not at the point where bottlenecks and prices pressures tend to develop," and said that as a result, "the manufacturing climate is thus not in any general inflationary state." But Northern Trust economist Asha Bangalore said "The steady climb in the operating rate justifies the hawkish stance of the [Fed]."

Stock and bond markets, which have been extremely sensitive of late to economic data that might help investors guess the Fed's future intentions, were closed in observance of Good Friday.

James P. Miller writes for the Chicago Tribune.

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