Dark days still ahead for manufacturers

The Associated Press
Saturday June 16, 2001

WASHINGTON — Manufacturing activity plummeted in May, the eighth straight monthly decline, stifling hopes that the battered industrial sector’s darkest days may have passed. 

With fresh data also released Friday showing consumer inflation – outside of soaring energy costs – pretty much under control, the Federal Reserve has leeway to cut interest rates again later this month in an effort to prevent industrial weakness from dragging down the rest of the economy, analysts said. 

Industrial output at the nation’s factories, mines and utilities fell by 0.8 percent in May, the Federal Reserve reported. The drop was double what analysts were predicting and came on top of a sharp, 0.6 percent decline in April. 

Operating capacity declined to 77.4 percent in May, the lowest level since August 1983, as companies throttled back production in the face of sagging demand. Operating capacity in the high-tech sector fell to its lowest point in 25 years. 

“It’s a blood bath,” said Mark Zandi, chief economist at Economy.com. “The problems are intensifying. Manufacturing is in the middle of a full-blown recession and threatens to take the rest of the economy down with it.” 

On Wall Street, the manufacturing report and earnings warnings from Nortel Networks, JDS Uniphase and McDonald’s pushed stocks lower. The Dow Jones industrial average closed down 66.49 at 10,623.64. 

The national economy has slowed markedly beginning in the second half of last year. But manufacturing has been the hardest hit and is in a recession, forcing the loss of a half-million jobs this year alone. 

“The decline in industrial production shows that manufacturing is dead in the water,” said National Association of Manufacturers President Jerry Jasinowski. 

The Fed’s report revived fears that the industrial sector’s malaise might deepen even more and spill over to other parts of the economy, throwing it into recession. 

“We have not seen the bottom of the manufacturing downturn,” predicted Lynn Reaser, chief economist at Banc of America Capital Management. “The Fed must be concerned about the possibility that the negative momentum could build and spread.” 

To stave off recession, the Fed has slashed interest rates five times this year, driving borrowing costs down to their lowest point in seven years. Analysts anticipate Fed Chairman Alan Greenspan and his colleagues will lower rates for a sixth time when they meet June 26-27. 

While many are predicting a quarter-point cut, economists said the weak industrial production report greatly raised the odds of another half-point reduction. 

The Fed has room to make another bold move, economists said, given their view that the government’s latest inflation report was benign. 

The Labor Department’s Consumer Price Index, a closely watched inflation gauge, rose by a seasonally adjusted 0.4 percent in May, up from a 0.3 percent increase in April, but on target with expectations. 

Most of the rise came from a big jump in gasoline and electricity prices. 

The “core” rate of inflation, which excludes volatile energy and food prices, inched up a smaller-than-expected 0.1 percent in May, compared with a 0.2 percent rise the month before, suggesting that most other prices were tame. It marked the best showing in five months. 

“We can’t discount the pain at the gas pump but energy prices don’t represent a signal of inflation problems ahead,” said Bill Cheney, chief economist at John Hancock. 

While economists are keeping their eye on inflation creep, many project that higher prices for energy are more likely to take a bite out of companies’ profits than be passed along to consumers in the form of higher prices – a difficult undertaking when the economy is weak. 

During the first five months of this year, consumer prices rose at an annual rate of 4 percent, compared with 3.4 percent for all of 2000. The pickup largely reflects soaring energy costs, which have increased at a rate of 16.3 percent this year. 

In May, all energy prices shot up by 3.1 percent, following a 1.8 percent increase. 

Gasoline prices led the way, increasing 6 percent in May, the biggest leap in eight months. Electricity costs jumped 1.3 percent and fuel oil costs rose 0.5 percent. 

Gasoline prices during a seven-week period ending in mid-May soared by a whopping 31-cent-a-gallon average nationwide, according to the Energy Information Administration. During the past month, prices declined by 7 cents on average nationwide, but could rebound if there are supply or refinery problems. 

Food prices increased 0.3 percent in May, up from a 0.1 percent gain, while clothing and car prices fell 0.9 percent and 0.1 percent, respectively. 

On Thursday, NAM’s Jasinowski thought his industry might have seen the worst. But after the Fed’s report Friday, he said he expected “industrial production to hit bottom this summer.” 


On the Net: 

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

Consumer Price Index: http://www.bls.gov/