Is worst over?

Posted: Thursday, August 16, 2001

WASHINGTON -- The nearly yearlong deterioration in industrial production slowed in July, raising hopes that the worst may have passed for the battered manufacturing sector

Output at the nation's factories, mines and utilities fell 0.1 percent last month, following a 0.9 percent drop in June, the Federal Reserve reported Wednesday.

July's reduction was the 10th consecutive monthly decline in industrial production. Still, economists were heartened that the latest decline was smaller than the 0.3 percent drop they were forecasting.

''The manufacturing sector has been the weakest link of the U.S. economy but it now appears that the worst is clearly over and that the way has been cleared for an upturn to take place over the next six to 12 months,'' said Lynn Reaser, chief economist for Banc of America Capital Management.

Last month's 0.1 percent decline was the best performance since output edged up by 0.2 percent in September, the month before the steady slide began.

On Wall Street, the report failed to cheer investors. The Dow Jones industrial average lost 66.22 points to close at 10,345.95.

Manufacturers have borne the brunt of economic slowdown, and many believe the industry is in a recession of its own. In response to sagging demand, manufacturers have slowed production and shed 837,000 workers during the 12 months that ended with July.

Especially encouraging to some economists was that factory production, down a sharp 1 percent in June, was flat in July. National Association of Manufacturers economist David Huether viewed that as ''a welcome sign that the plunge may finally be over.''

A big 4.7 percent gain in automobile production last month -- the largest increase since March -- helped halt the slide. The strength in automotive manufacturing helped to offset a 2.4 percent drop in production of computers and other high-tech equipment.

During the slowdown, businesses have scaled back spending on such capital equipment, which fueled the economic boom.

''Stability seems to have shown up in 'old economy' manufacturing but that doesn't seem to be the case in 'new economy' high-tech manufacturing,'' cautioned economist Clifford Waldman, president of Waldman Associates.

Also Wednesday, a Commerce Department report found that businesses whittled inventories of unsold good in June by a seasonally adjusted 0.4 percent -- on top of a 0.2 percent reduction -- for the fifth monthly decline in a row.

Economists said it was a positive development. They said companies must pare excess stocks in order to lay the foundation for increased production in the future, something that would bode well for a comeback for the overall economy.

But inventory reduction translates into a drag on economic growth. The May and June reductions will probably cause the government to lower its initial estimate that the economy grew at a 0.7 percent rate in the second quarter.

Reaser predicted that the government's next estimate of Gross Domestic Product in the second quarter, which will be released Aug. 29, will show the economy did not grow at all. Others believe it may have actually slipped into reverse.

Treasury Secretary Paul O'Neill said Wednesday he was hopeful the economy would return to higher levels of growth in the fourth quarter.

''I think we put now behind us a seven-months worth of a correction process with inventories going down,'' he said on the cable network CNBC. ''I think we are now on the threshold of improvement.''

The 0.4 percent decline in inventories came even as business sales fell by 1.4 percent in June, the largest drop in nine years, following a 0.9 percent increase in May.

Many economists remain hopeful that tax rebate checks, lower energy costs, and the Federal Reserve's credit easing will spark demand and spending in the months ahead.

To avert a recession, the Federal Reserve has reduced interest rates six times this year, totaling 2.75 percentage points. Many economists said that Wednesday's reports would justify a more conservative quarter-point move when policy-makers meet on Tuesday. The National Association of Manufacturers is among those pushing for a half-point reduction.

The Fed's report also showed that output at gas and electric utilities, which rose by 1 percent in June, fell by 0.5 percent in July, reflecting mild temperatures, economists said. At mines, production declined by 0.6 percent, after a 0.7 percent drop.

Total operating capacity for the industrial sector decreased slightly from 77.2 percent to 77 percent in July, its lowest point since August 1983, as companies continued to react to slumping demand. Still, the 77 percent rate was stronger than many analysts expected.

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On the Net:

Industrial production: http://www.federalreserve.gov/releases/G17/

Inventories: http://www.census.gov/mtis/www/mtis.html

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