- The Washington Times - Wednesday, April 17, 2002

Production by U.S. industry last month posted the biggest gain in nearly two years, but a rise in oil prices pushed inflation higher.

That news yesterday, with better-than-expected earnings from some of the nation's major companies, fueled the Dow Jones Industrial Average to a gain of 208 points, or 2 percent, and the Nasdaq Composite Index 63 points, or 3.5 percent.

The Federal Reserve reported that output at the nation's factories, mines and utilities rose 0.7 percent in March, after a solid 0.3 percent gain in February, a sign that the turnaround in the manufacturing sector is gaining momentum. It was the third straight monthly increase.

That's good news for the national economy and for America's manufacturers, which saw hundreds of thousands of jobs evaporate during the recession.

Though the budding economic revival isn't causing a run-up in consumer prices, soaring oil costs could slow or derail the recovery.

"Oil prices. That's the great wild card," said David Seiders, chief economist for the National Association of Home Builders.

The Labor Department's Consumer Price Index, a closely watched inflation gauge, rose 0.3 percent in March, after a 0.2 percent advance in February. Virtually all of the pickup came from energy prices, which shot up 3.8 percent, the biggest increase in 10 months.

Tensions in the Middle East were a key force behind the increase. Oil prices retreated last week, only to flare again this week, stoked by uncertainties in Venezuela, the world's fourth-largest oil exporter.

While many economists are hopeful that energy prices will moderate, they acknowledge that soaring energy costs are a potential Achilles' heel for the economic recovery.

Economists said the odds are growing that the Federal Reserve may leave short-term interest rates now at 40-year lows unchanged into the summer.

Out-of-control energy prices would cause consumers to lose confidence and retrench, snuff out a manufacturing comeback and send corporate profits tumbling.

Gasoline prices rose 8 percent in March, the largest advance in six months, reflecting higher oil costs and stronger demand. Fuel-oil prices rose 2.2 percent, the biggest increase since December 2000, and natural-gas prices increased 0.8 percent. Food prices rose 0.2 percent for the second month in a row.

But excluding volatile energy and food prices, the "core" rate of inflation moderated, rising just 0.1 percent last month, down from a 0.3 percent increase. That suggested that most other prices were remaining well-controlled.

Prices for new cars and trucks, computers and telephone charges actually fell.

Competitive factors, cheaply priced imports and signs that consumers who kept buying throughout the recession don't have a lot of pent-up demand coming out of it are restraining price increases for some goods, economists said.

As the manufacturers pick up steam, the home-building sector, which propped up the economy during the slump, is losing some.

Housing construction fell 7.8 percent in March, the largest decline in two years, the Commerce Department said. Even with the drop, builders began work on 1.65 million units, at an annual rate, a still-robust level. Economists predict a slowdown but still foresee healthy activity.

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