Factories' Output Rose in August

Ford Escapes roll off the line. The country's industrial production rose 0.8 percent last month, following a 1 percent rise in July, the Federal Reserve reports.
Ford Escapes roll off the line. The country's industrial production rose 0.8 percent last month, following a 1 percent rise in July, the Federal Reserve reports. (By Charlie Riedel -- Associated Press)
By Neil Irwin
Washington Post Staff Writer
Thursday, September 17, 2009

The nation's factories boosted their output in August for the second straight month, the latest confirmation that an economic expansion is likely underway. Meanwhile, consumer prices rose last month, but mainly due to higher prices for gasoline.

Industrial production rose 0.8 percent last month, the Federal Reserve said Wednesday, following a 1 percent rise in July. The July increase had been the first since October 2008, and the report is among the strongest evidence yet that the economy made a shift this summer from contraction to expansion, at least as measured by gross domestic product.

The industrial sector, meanwhile, was operating at 69.6 percent of its capacity, up from 69 percent in July. That reflects more idle factories being put back to work, another positive sign.

The stock market rose on the solid economic data, and has been up for eight of the last nine trading days. The Dow Jones industrial average rose 108 points, or 1.1 percent. The broader Standard & Poor's 500-stock index rose 1.5 percent, and is up 7.4 percent since Sept. 2.

The improved industrial numbers reflect in part General Motors and Chrysler plants coming online after a long hiatus. But more broadly, they show an emerging trend in the economy: Business inventories are so low for a wide range of goods that factories must ramp up production just to keep up with demand.

The open question, economists said, is whether or how much that positive momentum will spread broadly across the economy and continue much beyond the summer. With retail sales holding up well, according to August numbers released earlier in the week, signs are reasonably good so far.

But that momentum could prove fragile. "Another jolt to consumer confidence would quickly knock the legs out from under auto sales and leave automakers backpedaling from fourth-quarter production schedules," said Stuart Hoffman, chief economist at PNC Financial Services Group.

There was a mixed picture, meanwhile, on inflation in Wednesday's data. The Labor Department said that consumer prices rose 0.4 percent in August, as measured by the consumer price index. That reflected a 4.6 percent rise in energy prices, with a particular boost in the cost of gasoline, which rose 9.1 percent.

However, excluding volatile food and energy prices, prices rose a modest 0.1 percent, consistent with the view, widespread among economists, that inflation isn't much of a threat in the near future, given that the economy is operating well below full capacity.

"Inflation is a potential threat, but for some way down the road, not today," said Nigel Gault, an economist at IHS Global Insight.

The numbers were particularly distorted by the government's "Cash for Clunkers" trade-in program. New car prices fell 1.3 percent, which was less than many analysts had predicted. The clunkers program was expected to put more downward pressure on auto prices. Used car prices, meanwhile, rose 1.9 percent, as the dramatic decline of auto pricing from the deepest period of the recession appeared to recede.

Among other goods, apparel prices fell 0.1 percent while prices for medical services were up 0.2 percent from July levels. Food prices rose 0.1 percent in August, after a 0.3 percent decline in July.

But even as serious inflation doesn't seem to be on the horizon, the numbers also give little evidence of deflation, or a cycle of falling prices. The steep price declines of nearly a year ago, when the economy appeared to be in near-freefall, seem to have abated across a wide range of goods and services.

Also Wednesday, the Commerce Department said that the current account deficit, or the shortfall in American exports and investment income from abroad relative to imports and investment returns paid to foreigners, narrowed in the second quarter.

The broad measure of the nation's trade shrank to $98.8 billion, from $104.5 billion in the first three months of the year. While both imports and exports declined through the first half of the year, imports declined faster, meaning that the U.S. trade deficit narrowed. Meanwhile, the income that foreigners earned from investments in the United States declined, contributing to the lower current account deficit.

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