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Dow Jones & Company Inc Jun 16, 1989WASHINGTON -- Industrial production leveled off in May after a brief spurt the previous month, the Federal Reserve reported, providing further evidence that the industrial sector is slowing.
Production by the nation's factories, utilities and mines was unchanged last month, following a revised 0.6% rise in April. Meanwhile, the Fed reported that industry reduced its capacity use three-tenths of a percentage point to 83.8% last month.
The Fed's revised April figures showed that the economy had experienced more robust growth than had been estimated. Industrial production grew 0.6% instead of 0.4%, while capacity utilization rose three-tenths of a percentage point rather than two-tenths. April's increases in both areas were generally seen as anomalies amid several months of slower activity. All the figures are adjusted for seasonal fluctuations.
Yesterday's figures cheered most economists, who said the nation appeared headed for a "soft landing," when the slowing economy will shrug off inflationary pressures in the coming months without slipping into a recession.
"It doesn't look like we're heading for either a recession or inflation," said Cynthia Latta, senior economist at Data Resources Inc. in Lexington, Mass. "The flat showing for industrial production is consistent with the soft-landing scenario."
May's drop in capacity utilization -- especially in the automobile industry and construction -- showed weakening consumer demand, economists said, easing fears that inflation was getting out of control. Production of consumer durable goods -- items, excluding autos, that are expected to last at least three years -- and of construction supplies both dropped 0.8%. Business equipment, materials, and mining were the only areas that registered gains.
"That's a good mix because it shows a switch from consumption to business investment," said Priscilla Trumbull, industrial economist at the WEFA Group, a forecasting and consulting firm in Bala Cynwyd, Pa.
Although last week's report of a jump in May producer prices indicated to many economists that inflation wasn't licked yet, yesterday's figures supported -- for now -- the Fed's current anti-inflationary policy, economists said. For more than a year, the Fed has been attempting to put the brakes on the economy by nudging up interest rates, which makes borrowing more expensive and damps industrial production and consumer spending. But recently the central bank eased credit amid signs that the economy was slowing enough to ease inflationary pressures.
Economists had feared by the end of last year, when capacity utilization reached a 10-year high, that the economy was dangerously close to overheating. The resulting shortages and production backlogs, they feared, would cause prices to spiral. But May's drop, following April's revised sharp rise, continued "the easing that started at the beginning of the year," the Fed said in its report.
"With the falls in capacity utilization, why all the worries about inflation?" said Maury Harris, chief economist at PaineWebber Group Inc. "This tells me that the economy is not fully employed and that there is plenty of room to run."
Some economists suggested that the weak production figures meant it was time for the Fed to further loosen interest rates. "We're beginning to wonder if we're not at the soft landing already," said Ms. Trumbull.
Here is a summary of the Federal Reserve Board's report on industrial production in May. The figures are seasonally adjusted.
| % change from |
| April May |
| 1989 1988 |
| Total .................... 0.0 3.9 |
| Consumer goods ......... -0.4 4.3 |
| Business equipment ..... 0.2 6.9 |
| Defense and space ...... -0.3 -4.0 |
| Manufacturing only........ -0.1 4.1 |
| Durable goods .......... -0.1 3.4 |
| Nondurable goods ....... 0.0 5.1 |
| Mining.................... 1.2 1.4 |
| Utilities................. -0.5 4.3 |
The industrial production index for May stood at 141.4% of the 1977 average.
Credit: Staff Reporter of The Wall Street Journal
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