Industrial production jumped by 1.8 percent in July, marking the eighth successive increase in factory output since the recession ended last November, the government reported yesterday.
Last month's strong gain in production showed that the recovery continued at a rapid pace into the third quarter of the year after its upward surge in the second quarter.
During the three months from April to June, the nation's gross national product (GNP) expanded at a vigorous 8.7 percent annual rate.
New York economist Alan Greenspan yesterday predicted that the third quarter growth rate would match that. The economy "is clearly not slowing in the current quarter," he said.
Commerce Department chief economist Robert Ortner called the Federal Reserve release on industrial output, "a pretty glowing report." The Fed said that July's surge in production was widespread across industries, with "especially sharp rises in automobiles and steel." These two industries were particularly hard hit by recession. The July heat wave also led to a 1.5 percent increase in utility production, as "Americans were running their air conditioners around the clock," Ortner said.
Last month's gain in industrial output was the second largest since the recovery began, exceeded only by a 1.9 percent increase in April, according to yesterday's release.
Factory production last month was 10.2 percent above the recession's low point last November and 7.1 percent higher than in July 1982, the Federal Reserve said. However, it was still 3.5 percent below the previous peak two years ago, while unemployment is substantially higher than before the recession began.
The strength of the economy's recovery has taken most analysts by surprise. There are now widespread fears that the fast growing economy will collide with continued monetary restraint and push interest rates up still higher, threatening the recovery in housing and other interest-sensitive areas in the economy.
The Federal Reserve has already tightened credit policy somewhat in the face of rapid monetary growth and vigorous economic recovery. Economist David Wyss of Data Resources Inc. said yesterday that the Fed may push rates up another notch if output continues to expand at the current pace.
However, the latest figures for the money supply, released last Friday, cheered financial markets as they showed slower growth than expected.
The housing industry responded quickly to the drop in interest rates that sparked recovery, and is most vulnerable to an upturn in rates.
A separate Commerce Department report yesterday said that housing starts were off slightly in July for the second month in a row. Details on Page D8.
Yesterday's industrial output release said, however, that production of goods for the home continued to rise in July, "in particular, carpeting and furniture output now exceeds the previous highs reached in 1979," the Federal Reserve said. Production of construction supplies was up by more than 2 percent in July, according to yesterday's report.
The consumer has so far been leading the recovery, with big increases in spending during the second quarter of the year. This has fed through to increased factory production, and consumer goods output rose 1.7 percent last month. "Autos were assembled at an annual rate of 7.4 million units, sharply higher than the rate of 6.8 million units reached in June," the Fed report said.
However, retail sales flattened out in July, recent government figures show. As production increased, it is likely "that some restocking is going on," Wyss said.
A swing from cutting inventories to building them up is expected to provide the major push for the economy in the current quarter, analysts say.
Yesterday's Federal Reserve release also showed a 1.1 percent increase in nondurable consumer goods output in July; a 3.4 percent increase for durable consumer goods; a one percent rise for business equipment production, although output in this category remained 2.3 percent below its level of July 1982, and a 1.8 percent increase in overall manufacturing output.
The July release revised upwards, to 1.3 percent, the production increase recorded for May and left unchanged the 1.1 percent rise previously reported for June.
Wyss said he was surprised at the strength of industrial production, given the weakness of retail sales in July. In June, business ran down inventories as sales outstripped production. The pattern was likely reversed last month.
Consumers ran down their savings to fund the second quarter buying spree and Greenspan said he expected spending growth to slow until savings were restored to a more normal level.