Industry output revives in Dec.

Wholesale price index also increases, making Fed rate cut less likely

January 18, 2007|By James P. Miller | James P. Miller,Chicago Tribune

Output from the nation's mines, factories and utilities displayed unexpected strength last month, reflecting a solid upturn in manufacturing activity, the government reported yesterday.

The Federal Reserve's statistical arm said industrial production rose in December by 0.4 percent, well above the 0.1 percent most experts had been forecasting. The latest reading also sharply contrasted the 0.1 percent declines that such production showed in October and November as the economy continued to lose momentum.

In another development yesterday, the Labor Department reported that its Producer Price Index, which reflects the wholesale prices producers pay for materials, surged 0.9 percent last month on higher food and energy costs, suggesting that inflationary pressures continue to present a potential threat.

Taken together, the reports suggest the economy is continuing to chug forward, despite the drag of significant weakness in the housing and automotive sectors.

Those dynamics could cause the Fed to hold interest rates steady well into 2007. That would be a disappointment to bond market investors who have been betting in recent months that the economy was weakening so much that the Fed would begin lowering rates in March.

"It appears that the head winds from the housing and auto sectors are receding, and U.S. factory output is moving along at a decent pace," said Robert Kavcic, economic analyst at BMO Nesbitt Burns.

That momentum, he said, combined with recent upward wage pressures and the continued threat of inflation, "could keep the Fed in pause mode."

Yesterday's reports provided a mixed picture, rather than a completely clear-cut trend.

The industrial-production figure would have been even stronger, for example, except that December's unusually warm weather held down output at the nation's utilities.

On the other hand, noted Manufacturers Alliance/MAPI economist Daniel J. Meckstroth, the warm weather also "brought buyers to the motor vehicle showrooms, which helped production in the industry."

Manufacturing output rose 0.7 percent, helped by an increase in automobile output.

That business-equipment spending indicates that despite the economy's slowdown, companies "are continuing to invest," said Wachovia economist John E. Silvia. He said that continued corporate willingness to spend "is a positive for the economy."

The Federal Reserve report "is a hopeful indication that the recent slowdown in industrial activity may be coming to an end," said David Huether, chief economist for the National Association of Manufacturers trade group.

On the other hand, said Merrill Lynch economist David Rosenberg, for the fourth quarter as a whole, industrial production was down by an annualized 0.6 percent, marking "the first time we've seen a negative IP quarterly [performance] since the second quarter of 2003."

A number of observers also emphasized that while the overall Producer Price Index climbed by a hefty 0.9 percent, the bulk of that increase came from the prices of food and energy.

Economists prefer to focus on the core inflation rate, which excludes those historically volatile sectors. December's core rate was a modest 0.2 percent, in line with expectations.

The latest producer price reading confirms that while inflation is not picking up speed, it's moderating at an extremely slow pace, if at all.

The result, said Joel L. Naroff, head of Naroff Economic Advisors, is an inflation threat "which is neither too hot for the Fed to do anything nor cold enough for a rate cut. The Fed will not move for quite some time."

James P. Miller writes for the Chicago Tribune.

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