Mixed economic signals hint at slow expansion

By Neil Irwin
Washington Post Staff Writer
Saturday, January 16, 2010

Manufacturers cut back on their output slightly in December, and inflation remained subdued, according to new data that show an economy muddling through an uneven expansion.

Overall, industrial production rose 0.6 percent last month, the Federal Reserve said Friday. But that growth was dominated by higher output by the nation's utilities, which had to crank out more electricity and natural gas due to the colder-than-usual month. Production in the manufacturing sector declined 0.1 percent.

Also Friday, the Labor Department reported that the consumer price index rose 0.1 percent in December, suggesting that inflation remained low. The rise was the same whether volatile food and energy were included or not. While energy prices are well above their levels of a year ago, the weak economy has kept businesses from raising prices more generally, and prices are up 1.8 percent from a year ago when food and energy are excluded.

The lackluster data contributed to a bad day on Wall Street, which was also dragged down by news in J.P. Morgan Chase's earnings report that the bank's retail division lost money and deepening jitters around the budget situation in Greece and other European nations. The Standard & Poor's 500-stock index fell 1.1 percent, and the Dow Jones industrial average was off 101 points, or 0.9 percent. European markets were down by similar amounts.

The data Friday reflected the mixed nature of economic turning points. Rarely do indicators all point the same way as recessions come and go; instead, there are frequently signals pointing in all directions.

For example, even though overall factory production declined in December, that followed a healthy 0.9 percent rise in November; averaging the two months probably gives a more accurate picture of the expansion underway. The nation's industrial sector was operating at 72 percent of capacity in December, the highest level in 13 months.

And there were other rosy signs for the nation's factories Friday, as the Federal Reserve Bank of New York's survey of manufacturers in its region showed a sharp rise in business conditions. That matches a report earlier in the month from the Institute of Supply Management that suggested accelerating manufacturing growth in December.

Still, economists stress that a sustained recovery won't happen until consumer demand for products expands in a sustained way.

"The initial burst of growth reflected the rebound from a severe recession," said Daniel J. Meckstoth, chief economist for the Manufacturers Alliance/MAPI, a trade group. "But now, the basic fact is that consumers are impaired with debt, jobs are still declining, and nonresidential construction activity will decline most of the year."

The signs on consumption from Friday's data suggest it will still be some time before consumers come out of their shell. The University of Michigan said its index of consumer sentiment rose to 72.8 in January from 72.5 in December, hardly suggesting any sharp turnaround in Americans' willingness to spend money.

That matches weak numbers released Thursday about retail sales, which fell 0.3 percent in December.

"Consumers are in no fit shape to drive the economic recovery," said Paul Dales, U.S. economist at Capital Economics.

Gross domestic product appears to have grown at a rapid pace -- possibly a 5 percent or faster annual rate -- in the final quarter of 2009. However, that was boosted by businesses starting to rebuild their inventories.

That growth could slow in the months ahead, Federal Reserve Bank of Richmond President Jeffrey M. Lacker said in a speech Friday.

"The trend is more in the neighborhood of 2 to 3 percent this year," Lacker said, referring to gross domestic product growth. "Even the more optimistic forecasters . . . do not expect a rapid improvement in national labor market conditions."

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