updated 9/15/2004 11:36:47 AM ET 2004-09-15T15:36:47

Industrial production slowed in August, rising by just 0.1 percent, suggesting the economy is still trying to work through a soft spot.

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The small rise in industrial activity reported by the Federal Reserve Wednesday followed a sizable 0.6 percent gain in July. The 0.1 percent rise in August, the weakest showing since a 0.4 percent decline in June, surprised economists. They were forecasting a 0.5 percent gain.

Federal Reserve Chairman Alan Greenspan, appearing before Congress last week, said economic activity hit a "soft patch" in late spring, which he said was related in large part to high energy prices. But he added at the time that there were some signs the expansion has "regained some traction" such as a pickup in the nation's payrolls in August.

Industrial output in August was restrained by declines in production at mines and utilities.

Mining production dropped by 1.1 percent in August, compared with a 1.3 percent gain in July. Output at utilities declined by 2.4 percent in August, following a 2 percent decline.

At the nation's factories, however, output rose by 0.5 percent in August, following a 0.9 percent advance the previous month.

Meanwhile, businesses saw their inventories rise in July as sales picked up, according to the Commerce Department.

It said that stocks of unsold goods increased by 0.9 percent in July, down from a 1.1 percent rise in June. Sales, meanwhile, rose by 0.6 percent in July _ three times the 0.2 percent increase registered in the previous month.

Economists say it is sometimes difficult to divine whether companies are adding to inventories because they anticipate stronger demand from customers or if inventories are rising because demand is lackluster.

Greenspan said last week that he had seen signs that the economy has recently regained some of its earlier strength.

Against that backdrop, many economists believe the Fed will boost short-term interest rates for a third time this year when they meet next week. That would push up a key rate from 1.50 percent to 1.75 percent. Economists say rates are still low by historical standards and that the rates gradually need to rise to help protect the economy against unwanted inflation.

President Bush and his Democratic opponent, John Kerry, have widely different views about the state of the economy and the jobs market _ topics of keen interest to Americans when they go to the polls on Election Day.

Private economists believe the economy is growing at an annual rate ranging between 3 percent to just over 4 percent in the July-to-September quarter, which would mark an improvement over the 2.8 percent pace recorded in the second quarter of this year.

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