Posted on: Tuesday, May 15, 2001

Production, inventories fall

By Jeannine Aversa
Associated Press

WASHINGTON — Industrial activity fell in April for the seventh month in a row, dashing hopes that the beleaguered sector was turning a corner.

The Federal Reserve reported yesterday that output at the nation's factories, mines and utilities declined by 0.3 percent last month, providing fresh evidence that the economy continued to slow in the spring.

While April's performance was weaker than many analysts expected, what was particularly disappointing to them was a big change in how the industrial sector did in March.

The Fed revised figures to show that output had fallen by 0.1 percent, rather than risen by a solid 0.4 percent as previously reported.

When March's figures came out a month ago, "we thought there's finally some sign of life in manufacturing," recalled Stuart Hoffman, chief economist at PNC Financial Services Group. But Monday's report indicates manufacturing "hasn't hit bottom yet," he said.

On Wall Street, investors were focused on interest rate policy by the Federal Reserve rather than the latest batch of economic data. The Dow Jones industrial average gained 56.02 points to close at 10,877.33.

The weakness that has gripped the economy since the second half of last year has hit the industrial sector the hardest.

At factories, production fell by 0.3 percent in April and has shrunk nearly 3.5 percent since its recent peak in September 2000, the Fed said.

Gas and electric utilities saw output fall by 1 percent in April, following a 0.4 percent rise in March.

Economists, while noting that the utilities figures tend to bounce around a lot from month to month, attributed the decline on less demand by manufacturers and other commercial businesses that have cut back on production to cope with the struggling economy. Economists also believed that mild and dry weather also was a factor in reducing demand.

Production at mines rose by 0.6 percent in April, on top of a 1.1 percent rise.

Operating capacity at factories, mines and utilities fell to 78.5 percent in April, the lowest level since April 1991, when the economy was emerging from its last recession.

"Industrial production could not be any bleaker," said economist Clifford Waldman of Waldman Associates.

In another report, businesses coping with the slowdown continued to make progress getting rid of extra stocks of unsold goods.

The Commerce Department said business inventories fell by a bigger-than-expected 0.3 percent in March. The decline came even as sales slid by 0.3 percent. In February, inventories and sales both fell by 0.4 percent.

Economists view reductions in excess stocks as a positive development because it brings supplies more in balance with demand and puts companies in a more stable position going forward.

But there is a downside. Because companies are focused on reducing, rather their aggressively building their inventories, that translates into a drag on economic growth. Economists believe that the 2 percent growth rate posted in the first quarter will be revised lower.

Fed Chairman Alan Greenspan has attributed much of the economic weakness to an effort by businesses to get work off excess inventories of unsold goods. Greenspan has said companies are working hard, but he didn't know how long it would take to complete the process.

To reduce inventories, companies have sharply cut production, laid off workers and deeply discounted merchandise.

In March, factory inventories fell by 0.6 percent, following a 0.4 percent decline. Sales rose by 0.4 percent in March after a 0.4 percent drop the month before.

Retailers' inventories decreased by 0.3 percent, after a 0.6 percent reduction in February. Sales, however, declined by 0.4 percent, following a 0.2 percent drop.

Wholesalers saw a 0.1 percent uptick in inventories in March, after a 0.2 percent decline. Sales declined 1.3 percent, following a 0.6 percent decrease.

Automobile dealers' inventories fell by 1.3 percent in March, after a 1.8 percent drop. Many auto makers have temporarily closed plants and cut back on shifts to trim production so as not to add to the inventory pileup. They also offered lots of incentives and cheap financing to attract buyers.