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Slow growth means rates may stay put


A string of reports released yesterday buttressed recent evidence that the U.S. economy is enjoying strong, but slowing, growth - with no signs of the inflationary pressures that could induce the Federal Reserve to raise interest for the seventh time since last summer, economists said.

Producer prices - excluding rambunctious energy prices - unexpectedly fell last month, the Labor Department said in one of the reports. That's a solid hint that inflation remains at bay, reducing pressure on the Fed to boost interest rates at its next meeting, Aug. 22. In addition, output at U.S. factories, mines and utilities rose last month at its slowest pace in nine months, underscoring that view.

But yesterday's economic reports gave conflicting signals, too. For instance, industrial production - while tepid in June - grew at a 7 percent clip in the second quarter, the fastest pace in four years. Retail sales also rose last month - indicating that the central bank's actions might not yet have slowed the U.S. economy from a sprint to a jog.

Even so, when viewed in conjunction with other recent snapshots of the economy, most economists viewed yesterday's reports in a positive light, offering a picture of an economy that remains strong enough for personal incomes to rise and corporate profits to keep growing - but not strong enough to touch off ruinous inflation.

"We continue to get very favorable reports," said Gerald D. Cohen, senior economist for Merrill Lynch & Co. in New York. "In our view, the economy is slowing, and the Fed is on hold indefinitely. Inflation remains benign, and [yesterday's] reports remain very supportive of that viewpoint."

Stocks rose slightly on the news. Technology shares continued their recent advance, with the Nasdaq composite index climbing 71.32 points, or 1.7 percent, to end the week at 4,246.18. The Dow Jones industrial average shed early losses to finish the day higher by 24.04 points, or 0.22 percent, closing at 10,812.75.

The Producer Price Index - a measure of wholesale prices, or the prices of goods as they move through the manufacturing and distribution cycles before reaching consumers - fell 0.1 percent in June, once volatile food and energy prices were excluded.

That was the first drop in the "core" part of the PPI in five months and surprised economists, who had been expecting a 0.1 percent increase in this stripped-down version of the wholesale price index. And while the overall index rose 0.6 percent, economists tend to focus more on the core rate.

Although the Consumer Price Index - which will be announced next week - is considered more important than the PPI, it's important to track producer prices, because that's one way to see if inflationary pressures are building within the economy, said Morry Zolet, a senior vice president for investments for Salomon Smith Barney in Baltimore. The reason: Prices at the wholesale level can rise only so long before they are passed on to consumers in the form of higher prices - which is tangible inflation.

Consumer spending accounts for at least two-thirds of all U.S. economic activity. This focus on the consumer is why economists watch such things as retail sales.

Total sales rose a higher-than-expected 0.5 percent last month after an upwardly revised 0.3 percent rise in May, led by higher sales for vehicles, parts and services at auto dealers, and increased sales at gasoline stations, the Commerce Department said. Excluding autos, sales rose 0.2 percent in June after a revised 0.5 percent increase in May. Economists had predicted an overall increase of 0.3 percent in retail sales, and 0.5 percent in sales excluding autos.

Strong auto sales - coupled with big demand for computers and related hardware that companies are gobbling up to build Internet businesses and to make themselves more productive - were the high points in the Fed's report on industrial production, which increased a less-than-expected 0.2 percent last month after climbing 0.5 percent in May. However, demand for clothing, steel, electricity and appliances suggests that overall factory production is slowing, economists said.

"The horizon looks extremely bright with full employment, low inflation and soaring consumer confidence - that's the recipe for a strong economy," said Richard Yamarone, senior economist at Argus Research Corp. in New York.

Bloomberg News contributed to this article.

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