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Equipment fuels a modest rise in industrial production

By Dana Hedgpeth
Washington Post Staff Writer
Tuesday, March 16, 2010; A12

Industrial production rose in February because of increased demand for computers and semiconductors, a sign some economists say that gains in U.S. business investment are continuing.

Overall production was up 0.1 percent last month after increasing 0.9 percent in January, according to figures from the Federal Reserve. It was the eighth straight monthly increase, suggesting that economic improvement is steady even though the recovery is considered to be modest.

"We had a slightly better outcome than we expected so it shows there is broad-based strength in manufacturing," said John Herrmann, senior strategist at State Street Global Markets.

The main driver was the production of business equipment, which was up .4 percent as demand for semiconductors, computer equipment and communication gear rose.

"A lot of companies put their IT spending on hold," said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI. "But as the economy has picked up they've released some of their IT budgets. Now producers are trying to rebuild their inventories, which were low at the end of last year. There's unexpectedly strong growth there."

But not every area of industrial production was up.

The severe winter storms that hit the Northeast in February were a double-whammy in some parts of production. For utilities, there was a 0.5 percent increase. But manufacturing, the biggest part of the industrial index, fell 0.2 percent, as factories closed, leading to fewer hours worked by employees and cuts in their earnings. Mining increased 2 percent.

Production for vehicles and car parts dropped 4.4 percent in February, due in large part to Toyota closing factories to deal with a major recall on some of its vehicles with sudden acceleration and braking problems. Those closings "rippled adversely through the supply chain," Meckstroth said.

"When they shut down, the transportation company stops, which adversely affects them, their workers, and it affects the mechanics who service the trucks, and the diesel-fuel sales," Meckstroth said. "It all cascades down the train."

February's numbers gave economists other signs that manufacturing would continue to recover this spring, as the capacity utilization -- portion of plants used for production -- climbed to 72.7 percent from 72.5 percent.

Still, Dave Heuther, an economist at the National Association of Manufacturers, said the report "continues to demonstrate that this will be a long and slow recovery."

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