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Industrial production bounces back

Industrial production grew by 0.7 percent in February, with all of the strength coming from a big pickup in output at utilities. Factory production was flat.
/ Source: The Associated Press

Without the vagaries of changing weather patterns, the growth rate in America’s industrial production sector last month likely would have been negligible.

But Mother Nature’s weather flipflop — a return of more-normal winter cold in February after an unusally warm January — caused this significant economic measure to increase by 0.7 percent. This is because of a big pickup in output at utility companies. As this was happening, factory production was flat.

The sharp increase reported for overall industrial activity by the Federal Reserve on Friday came after a 0.3 percent dip in January.

The decrease in the growth rate in January reflected a huge decline in production at gas and electric utilities due to unusually warm weather. And the 7.9 percent increase in utility output registered in February reflected just the opposite, the Federal Reserve Board said.

The report, thus, offered a mixed picture on activity in the various pieces of the economy’s industrial sector.

Production at factories was flat in February, after jumping by a strong 0.8 percent in January. The showing in February was the weakest since a 0.5 percent decline in factory output in September.

Weakness in the automotive sector was a factor in February’s lackluster showing for factory activity.

Economists, however, believed the flat reading in manufacturing output was just a temporary lull and not a harbinger of a troubles ahead.

“If anything, this is a pause,” said economist Ken Mayland, president of ClearView Economics. “My impression is that manufacturing is doing better than the flat reading suggests.”

Output at mines, meanwhile, fell by 0.5 percent last month, following a 2.3 percent increase in January.

The 0.7 percent increase in overall industrial activity in February was slightly weaker than economists were expecting. Before the report was released, they were forecasting a 0.8 percent increase.

Economists believe the economy snapped out of an end-of-year funk and will log healthy growth in the January-to-March quarter.

Against that backdrop, analysts expect the Federal Reserve will boost short-term interest rates by one-quarter percentage point to 4.75 percent when it meets on March 27-28. It will be Ben Bernanke’s first meeting to examine interest rates as Fed chairman.

The Fed has been tightening credit for nearly two years in an effort to keep the economy and inflation on an even keel.

The report also showed that the proportion of overall industrial capacity in use in February rose to 81.2 percent. That matched December’s figure, which was the highest since September 2000.

Economists look at this capacity utilization figure for clues about the future inflation climate. For instance, if plants were running at full tilt and couldn’t crank out enough goods to satisfy customers’ demand, then there could be a run up in prices.

Stuart Hoffman, chief economist at PNC Financial Services Group, observed: “This will receive close attention from the Federal Reserve as a rising capacity utilization rate could eventually signal mounting inflationary pressures, though we remain well short of that point.”