Production grows without inflation Industrial output rises but producer prices fall for 2nd month


WASHINGTON -- The dream team of growth and no inflation made a repeat appearance in February as U.S. industrial production rebounded and producer prices fell for the second month in a row. Consumer confidence also rose this month to a more than 30-year high.

"It's nirvana," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. in Chicago. "Obviously the economy is going great."

The output of factories, mines and utilities rose 0.5 percent last month, reversing a 0.1 percent decline in January, as demand rose for motor vehicles and appliances, Federal Reserve figures yesterday showed.

Meanwhile, the prices paid to U.S. factories, farmers and other producers unexpectedly fell 0.4 percent last month after declining 0.3 percent a month earlier. Falling oil prices accounted for much of the drop.

The economy's good news gave only a little comfort to bond investors. The benchmark 30-year Treasury bond rose 1/4 in late trading, pushing down the yield about 2 basis points to 6.94 percent. Stocks, however, rebounded from Thursday's plunge. The Dow Jones Industrial Average rose 56.57 points to close at 6935.46 after falling 160 points yesterday.

While yesterday's numbers don't suggest an immediate need for Fed policy-makers to raise the overnight bank lending rate to cool the economy, analysts said continued strong growth may force the central bankers to act, especially if consumers remain in a buying mood.

That's a good bet, judging by this month's rise in the University of Michigan's consumer confidence index to 101.9 -- the highest since November 1965 -- from 99.7 in February.

"A pre-emptive move might be required," Wesbury said. "Still, if the Fed is to move it would be one of the shortest hikes and smallest hikes they've done -- 50 basis points at most."

The industrial production report showed that production of autos and trucks increased in February. Consumer goods output was unchanged and energy output fell.

The Fed also said the amount of industrial capacity being used increased to 83.3 percent in February from a revised 83.2 percent in January. The January plant-use rate was estimated a month ago at 83.3 percent.

The first of two Labor Department inflation reports for February -- the consumer price index, or CPI, will be issued Wednesday -- suggests inflation may not be as threatening as some investors fear, even as the economy grows.

It was the first back-to-back decline in the Producer Price Index since September and October 1994, a government spokeswoman said. The overall decline was also the largest since October 1994.

The closely watched core rate of the PPI, which excludes food and energy costs, fell 0.1 percent in February, in part because electronic components posted their biggest monthly drop on record.

"With lower energy prices, the overall inflation rate will be lower in '97 than it was in '96," said David Wyss, an economist at DRI/McGraw-Hill in Lexington, Mass..

Still, some analysts doubt that will be enough to keep Fed Chairman Alan Greenspan on the sidelines.

"Growth leads to inflation, and the Fed chairman can't see that and not get worried," said Maureen Allyn, chief economist at Scudder, Stevens & Clark Inc. in New York. "He explicitly said we can't bank on being in a new paradigm. This is where you get to the pre-emptive notion."

Pub Date: 3/15/97

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