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Industrial output took an unexpected 0.9% plunge in Jan. Wholesale prices took 2nd straight dip


WASHINGTON -- A sharper-than-expected decline in industrial production in January was reported by the government yesterday, casting a pall over a glimmer of economic recovery reported just 24 hours earlier.

The 0.9 percent drop in January production was deeper and wider than the markets had expected, based on the already-known poor employment figures. Economists expected a January production decline of around 0.5 percent, mainly because of the slumping auto industry.

Yesterday's report was particularly disappointing, coming as it did just one day after reports that retail sales rose last month and auto sales improved early this month.

"The recovery obviously isn't ahead of schedule. If anything, it's behind schedule," said Murray Weidenbaum, chief economic adviser to President Ronald Reagan during the early 1980s and currently director of the Center for the Study of American Business at Washington University in St. Louis.

The government also reported yesterday that wholesale prices fell 0.3 percent in January, the second straight monthly decline, giving an early indication of the trend in retail prices and suggested that inflation remains under control.

Wholesale gasoline prices dropped 7 percent, the biggest decline in 10 months, and wholesale food prices fell 0.3 percent.

"I think the inflation outlook for the full year is a very bright one because there is excess capacity in almost every industry," said Paul Getman, who also noted increasing international competition and declining wage increases. "People can't afford to pay big price increases for goods, autos, houses," he said.

Although the drop in industrial output was the third in as many months and was the steepest in nearly a year, analysts said it could be lagging other, more hopeful, economic developments.

"It is behind the curve," said Mr. Getman, economist and managing director of Regional Financial Associates in Westchester, Pa. "It leaves me with the impression that the worst is over. There is no doubt, I think, that consumers are starting to spend again, and that's the necessary precondition for a recovery."

Thursday, more reassuring figures -- a 0.6 percent boost in retail sales and a decline in new unemployment claims -- gave the first real hint of an economic upturn. Domestic automakers also reported Thursday that sales of new cars and light trucks in the first 10 days of February were 23.8 percent higher than in the same period last year.

That report contrasted with yesterday's production figures, which showed a 12.7 percent drop in auto production last month, partly because of a winter storm in Detroit and seasonal layoffs.

William F. Treacy, chief economist with MNC Financial Inc., the Baltimore holding company that owns Maryland National Bank and American Security Bank, was particularly struck by the breadth of the production downturn, which included textiles, chemicals and industrial equipment.

U.S. factories were operating at an 8 1/2 -year low of 78 percent of capacity last month, down from 78.8 percent in December. It showed businesses were not yet convinced that consumers were ready to start serious buying, he said.

"I think it leaves us still expecting it is going to take some months before this recovery really gathers much momentum," Mr. Treacy said.

"I think we will see gradual, gradual improvement, probably in fits and starts, between now and the middle of the year. By the middle of the year, I think we will be starting to see significant improvement."

Samuel D. Kahan, chief economist with Fuji Securities in Chicago, said the latest figures suggested the economy was still "on hold," leaving the Federal Reserve Board with the "very difficult judgment" on whether to reduce interest rates further.

The National Association of Wholesaler-Distributors called for further credit easing by the Fed and said a survey of 267 wholesale executives showed only a "modest" 1 percent upturn in its confidence index, to 88.4 from 87.4, the first increase since the fourth quarter of 1990.

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