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Date: Tue, 17 Nov 92 12:53:40 EST
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11/17/92


TITLE Modest Gain Halts Slide In Factory Output

Sluggish Capacity Use Could Minimize Investment Tax Credit Chuck
Freadhoff

After slumping through the summer, production at the nation's
factories, mines and utilities picked up slightly in October, the
Federal Reserve said yesterday.

But the 0.3% increase, while a welcome change from recent de-
clines, wasn't enough to alter expectations that the economy is
not about to break out of its slow-growth mode.  The report indi-
cated the economy "is on a sluggish expansion path of 2% or a
little higher," said Kathleen Stephansen, a senior economist at
Donaldson, Lufkin & Jenrette. She is taking a "wait-and-see atti-
tude" on whether further gains are in store.  October's produc-
tion increase was only the second in five months. Output rose
0.8% in July but fell 0.4% in June, 0.3% in August and 0.2% Sep-
tember. The Fed's index of industrial production stood at 109% of
its 1987 base in October but only 0.6% above a year earlier.
Other government data released yesterday reinforced the image of
an economy stuck in second gear.  The Commerce Department said
business inventories were virtually unchanged in September, a po-
sitive sign that goods aren't building up on store shelves. In-
ventories rose slightly in each of the prior three months. Busi-
ness sales were up 1.3%, erasing a 1.3% decline in August.  The
Fed also reported that factories operated at 78.5% of capacity in
October, only a slight improvement from September's 78.4%.  Ra-
pidly rising capacity use is a sure sign the economy is heating
up. But modest gains provide "ample room to grow without fears of
inflation," Stephansen said.  The Fed's policymaking Federal Open
Market Committee meets today#m#cq#m# to set the course of short-
term interest


Modest Gain Halts Slide In Factory Output


rates over the next month or so.  Analysts don't expect rates to
be lowered again anytime soon. They cite uncertainty over
President-elect Bill Clinton's spending plans as well as some
economic indicators that have shown modest strength.  Caution ap-
pears to be the byword for manufacturers. A survey of 1,000 firms
released by Dun & Bradstreet Corp. found most expect output to be
sluggish through the beginning of next year and have no plans to
hire more workers.  They are trying to increase productivity by
keeping payrolls lean and asking workers to put in more overtime.

Without job growth, however, retailers have a tough time increas-
ing sales, which in turn means producers don't sell as much.
Taken together, yesterday's reports appear to be just another
chapter in a long-running story of slow economic growth.  Hopes
for a stronger recovery had been buoyed by an earlier report that
gross domestic product jumped 2.7% in the third quarter. But that
growth may not be sustainable, according to Douglas Lee, chief
economist for County NatWest Securities in Washington.

Much of the third-quarter growth was fueled by higher consumer
spending that Lee doesn't expect to continue. "As I look into the
fourth quarter, it's not going to show much movement," Lee said.
Clinton has promised to push for an investment tax credit aimed
at creating jobs. But with capacity use of just 78.5%, manufac-
turers appear to be able to hike production without spending more
on plant and equipment.  "There's more to an investment decision
that just the tax credits you're going to get," noted James Sol-
loway, chief economist for Argus Research in New York. "I would
think the investment tax credit is really marginal in its im-
pact."

Politicians overseas may have a bigger impact than Clinton on
U.S. industrial production, some economists said.  "Part of what
might be holding (output) down is the performance of the export
sector," said Michael Moran, chief economist at Daiwa Securities
America in New York.  The economies of Europe, Japan and Canada
are suffering, and conditions in Brazil and Mexico - two big U.S.
export markets - have worsened in recent months, Moran said.  Dun
& Bradstreet's survey showed manufacturers do not expect exports
to increase in the next three months.  October's rise in indus-
trial output was fueled almost entirely by increases in light
truck production. Excluding motor vehicle and parts, output
inched up just 0.1%.  Durable goods production rose 0.7%, with
light-truck activity accounting for most of it. Non-durable goods
were flat, and output at utilities fell 0.5%.  Mines, however,
posted a 0.5% gain due to higher production of natural-gas. The
natural-gas gains were attributed to platforms in the Gulf of
Mexico that were put back in service after being knocked out by
Hurricane Andrew.

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