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Production slips; wholesale inflation is tame

Factory production declined in October, signaling that U.S. consumers and businesses remain cautious in their spending and suggesting a sluggish economic recovery.
/ Source: The Associated Press

Factory production declined in October, signaling that U.S. consumers and businesses remain cautious in their spending and suggesting a sluggish economic recovery.

At the same time, the weak economy is keeping inflation in check. Wholesale prices rose less than expected last month.

Factory production represents the biggest portion of industrial output. Overall, industrial production rose 0.1 percent last month, less than economists had expected. The only bright spot in the Federal Reserve's report Tuesday was activity at electric and gas utilities.

A rebound in auto production, driven by the government's now-defunct "Cash for Clunkers" rebate program, has boosted industrial production in recent months. Car production sagged in October.

Even though overall industrial production rose for the fourth straight month, growth has slowed considerably. Production at factories fell 0.1 percent last month after a 0.8 percent increase in September. It was the first decline since June.

Production cutbacks last month affected not only autos, but also appliances, furniture and carpeting, clothing, computer and electronic products, paper products, petroleum and coal products, fabricated metal products and other things.

Wholesale prices remain tame, and Federal Reserve Chairman Ben Bernanke said Monday that inflation probably will remain "subdued for some time." That allows the central bank to keep the short-term interest rate it controls at its record low of nearly zero.

The Labor Department said Tuesday that its Producer Price Index rose 0.3 percent last month, after falling 0.6 percent in September. Analysts had expected a 0.5 percent gain, according to Thomson Reuters.

The index tracks the prices of goods before they reach store shelves and is considered an early read of price trends.

In the 12 months ending in October, producer prices fell 1.9 percent, the 11th straight decline.

Excluding volatile food and energy costs, the core index dropped 0.6 percent in October.

In the past year, the core index rose 0.7 percent, the smallest increase in more than five years.

High unemployment helps restrain labor costs, which enables companies to hold prices down. The unemployment rate jumped to 10.2 percent in October, a 26-year high.

Some economists say the jobless rate could rise as high as 11 percent by the middle of next year before starting to drift slowly downward.

Bernanke warned Monday that a number of "headwinds" — including rising unemployment and hard-to-get credit — will restrain the recovery.

After four straight losing quarters, the economy returned to growth in the summer at a pace of 3.5 percent from July through September. Economists believe growth probably slowed a bit in the current quarter.

The economy likely will continue to lose speed in the first quarter of next year, as the bracing impact of President Barack Obama's $787 billion stimulus package fades.

Faced with rock-bottom inventories of goods, businesses at some point will need to replenish them, one of the forces that is expected to help boost factory production in the coming months. Even the smallest increase in customer demand would probably force factories to bump up output because businesses' stockpiles are razor thin, analysts say.

Tuesday's report also showed that production at mines dropped 0.2 percent in October, following a 0.6 percent gain in September.

Output at gas and electric utilities, however, jumped 1.6 percent, after a posting 0.2 percent drop in September.

Elsewhere, food prices last month rose 1.6 percent, driven by a 24.2 percent jump in vegetable prices, the most in two years. Egg, fruit and milk costs also rose, according to the Labor Department.

Energy costs also increased 1.6 percent, as gas prices rose 1.9 percent. Oil prices rose as high as $81 per barrel in October before finishing the month at about $77, up from about $70 in September.

The government will report consumer prices on Wednesday. Economists surveyed by Thomson Reuters are forecasting a modest increase of 0.2 percent, partially from higher gas prices. Excluding food and energy, consumer prices are expected to grow 0.1 percent.

The expectation of low inflation gives the Fed leeway to hold rates low for an "extended period," Bernanke said Monday, repeating a pledge made at the central bank's meeting earlier this month.

Economists expect the Fed will hold rates near zero at its next meeting on Dec. 15-16 and into part of next year to help the recovery gain traction.