Posted on: Saturday, June 16, 2001

Manufacturing plummets as inflation stabilizes

Associated Press

WASHINGTON — Manufacturing activity plummeted in May, the eighth-straight monthly decline, stifling hopes that the battered industrial sector's darkest days may have passed.

With more fresh data released yesterday showing consumer inflation — outside of soaring energy costs — pretty much under control, the Federal Reserve has leeway to cut interest rates again later this month in an effort to prevent industrial weakness from dragging down the rest of the economy, analysts said.

Industrial output at the nation's factories, mines and utilities fell by 0.8 percent in May, the Federal Reserve reported. The drop was double what analysts were predicting and came on top of a sharp, 0.6 percent decline in April.

Operating capacity declined to 77.4 percent in May, the lowest level since August 1983, as companies throttled back production in the face of sagging demand. Operating capacity in the high-tech sector fell to its lowest point in 25 years.

"It's a bloodbath," said Mark Zandi, chief economist at Economy.com. "The problems are intensifying. Manufacturing is in the middle of a full-blown recession and threatens to take the rest of the economy down with it."

The national economy has slowed markedly beginning in the second half of last year. But manufacturing has been the hardest hit and is in a recession, forcing the loss of a half-million jobs this year alone.

"The decline in industrial production shows that manufacturing is dead in the water," said National Association of Manufacturers President Jerry Ja sinowski.

The Fed's report revived fears that the industrial sector's malaise might deepen even more and spill over to other parts of the economy, throwing it into recession.

"We have not seen the bottom of the manufacturing downturn," predicted Lynn Reaser, chief economist at Banc of America Capital Management. "The Fed must be concerned about the possibility that the negative momentum could build and spread."

To stave off recession, the Fed has slashed interest rates five times this year, driving borrowing costs down to their lowest point in seven years. Analysts anticipate Fed Chairman Alan Greenspan and his colleagues will lower rates for a sixth time when they meet June 26-27.

Although many are predicting a quarter-point cut, economists said the weak industrial production report greatly raised the odds of another half-point reduction. The Fed has room to make another bold move, economists said, given their view that the government's latest inflation report was benign.

The Labor Department's Consumer Price Index, a closely watched inflation gauge, rose by a seasonally adjusted 0.4 percent in May, up from a 0.3 percent increase in April, but on target with expectations.