Production at the nation's factories, mines and utilities fell an estimated 0.8 percent in September, the Federal Reserve reported yesterday, giving hard evidence that the U.S. economy probably is in a recession.
The decline, which followed a 0.3 percent drop in August, was broadly based. Every major grouping within the industrial production index except defense and space equipment showed a decline, the Federal Reserve said.
Separately, the Fed also reported a very large jump of $5.6 billion in the money supply measure M1-B for the week ended Oct. 7. The increase had been expected by analysts. It still leaves the level of M1-B well below the lower limit of the Fed's target range for growth of this aggregate. M1-B includes currency in circulation and checking deposits at financial institutions. Tables, D14
The largest declines in production were registered in construction supplies, durable-goods materials such as metals, and durable goods for the home such as appliances. The output of business equipment fell 0.3 percent, the first decline in that category since last February.
Most forecasters had been expecting some drop in industrial production since the Labor Department reported earlier that the number of hours worked declined sharply in September. But part of the drop in hours worked was thought to be the result of taking the employment survey in the same week as Labor Day. Federal Reserve officials adjusted their production estimates to offset that possibility, however, and still came up with the 0.8 percent decline, the largest since July 1980, when the last recession was ending.
The drop in industrial production is "consistent with the notion that the unemployment rate is going to go back to 8 percent during the fourth quarter," said Lacy Hunt, chief economist of Fidelity Bank of Philadelphia. "This points to a very steep drop in overall economic activity" from October through December, he said.
Auto assemblies fell more than 3 percent last month to an annual rate of 6.2 million units, and a further and somewhat larger reduction is scheduled for October, the Fed report said. Production of construction supplies went down 3.4 percent in September and is slightly lower than a year ago.
The production declines within the business equipment category were also widespread. Production of equipment for manufacturing, power, transit and farms all fell.
Industrial production accounts for about 30 percent of gross national product. At 152.1 percent of the 1967 average, industrial production in September was 5.3 percent above its level a year earlier. However, it was still 0.9 percent below the index's March 1979 peak, an indication of a lack of economic growth since that time.
Meanwhile, Yale University Prof. James Tobin, who earlier this week won the Nobel prize for economics, said today that President Reagan's economic policies are likely to produce "considerable economic pain and damage during a transition of several years."
Tobin, who was cited for his work in analyzing the relationship between financial markets and the investment decisions of families and businesses, said he expects the economy to remain stagnant at least through 1985 as a result of prolonged high interest rates.
"As Federal Reserve Chairman Paul Volcker and his colleagues appreciate much better than President Reagan and his associates, Fed money supply policies will not allow room for real economic growth unless wage and price inflation are reduced by a percentage point or two a year," Tobin said.
The Reagan administration's economic program of cutting taxes while trying to balance the federal budget by cutting spending is unlikely to achieve its goals of curing inflation and improving unemployment, productivity and investment, Tobin said.
"What it is sure to do is redistribute wealth, power and opporunity to the wealthy and powerful and their heirs," he said. "If that is its principal outcome, the public will become considerably disenchanted."