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Economic reports point to slow, steady recovery

Tue, 12/15/2009 - 6:35am
DANIEL WAGNER - AP Economics Writers - Associated Press

Further evidence that manufacturers are helping the economy slowly recover emerged Tuesday in a report that industrial production rose a better-than-expected 0.8 percent in November.

The gain showed that consumers are spending more, causing manufacturers to produce more goods.

Eventually, the economic rebound could raise inflationary pressures. One reminder was a separate report Tuesday that wholesale inflation surprisingly surged last month. Still, many analysts said the economy remains so weak that they didn't think the price increases would last.

The Federal Reserve begins a two-day meeting Tuesday and likely will weigh the bigger-than-expected increases in industrial output and wholesale prices. Should inflation pressures mount, the central bank could be forced to start raising interest rates sooner than expected.

But Fed policymakers aren't expected to raise a key rate at the end of their meeting Wednesday. The Fed has kept rates at record-low levels to bolster the shaky recovery.

Stronger activity at mines led last month's increase in industrial production, rising 2.1 percent. The manufacturing sector — the biggest chunk of industrial output — rose 1.1 percent. Utilities fell 1.8 percent, according to the Fed report.

The portion of industrial capacity in use rose to 71.3 percent, from 70.6 percent in October. It shows that factories, mines and utilities are using more of their plants as the recovery takes root. But capacity use remains far below the 80 percent level that existed for part of the past decade.

Wholesale prices jumped 1.8 percent in November, the Labor Department said. That's more than double the 0.8 percent gain analysts had expected. Core inflation, which excludes energy and food, rose 0.5 percent, the sharpest increase in more than a year.

Over the past 12 months, wholesale prices have risen 2.4 percent, the biggest gain over an annual period since October 2008. Wholesale prices had been negative compared with year-earlier levels for 11 straight months.

But analysts said industrial spare capacity remains so large and demand still so soft that inflationary pressures are likely to remain tame. Some noted that oil prices have fallen about 10 percent since the start of the month. And the higher core rate of wholesale inflation was driven by price increases for light trucks, which may be a temporary factor reflecting a shift to new 2010 models.

Throughout the economy, few companies appear to have much pricing power in the face of budget-conscious consumers. Best Buy Co., for example, predicted Tuesday that its profits will be squeezed as shoppers veer toward cheaper laptops and TVs.

Consumers without jobs or worried about losing them are holding back spending. Unemployment dropped slightly in November to 10 percent, from a 26-year high of 10.2 percent. But analysts say it will resume rising in coming months, further dragging on economic growth. High unemployment has kept a lid on prices as workers wary of layoffs have moderated wage demands.

Wholesale energy prices jumped 6.9 percent in November, the biggest surge since August. Gasoline prices rose 14.2 percent. And the cost of home heating oil jumped 18.3 percent last month.

Still, oil prices have been falling in recent days, hovering around $70 per barrel. That's down from a 2009 high of $82 per barrel hit in October.

Food prices rose 0.5 percent at the wholesale level last month, following a1.6 percent rise in October.

A 4.2 percent increase in the cost of light trucks and sport utility vehicles led the gain. The cost of cigarettes rose 2.6 percent.

The Producer Price Index reflects price pressures before they reach the consumer. The government will release its look at consumer prices on Wednesday. Economists say they will show a more moderate gain of 0.4 percent, with core consumer prices expected to rise 0.1 percent.

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