- The Washington Times - Saturday, November 16, 2002

ASSOCIATED PRESS
Big industry sank deeper into its slump, with production plunging in October by the largest amount in a year. Wholesale prices were up sharply, but economists said the inflation picture was exaggerated by new model cars and trucks.
The Federal Reserve's report yesterday showing that production at the nation's factories, mines and utilities slid by 0.8 percent from the previous month underscored the state of the industrial sector as the weakest link in the economy's recovery.
While the Fed's report raised new fears that industrial malaise could infect the rest of the economy, most economists continued to believe that the country would avoid falling back into a double dip of recession.
October's drop, which followed a 0.2 percent decline in September, was the third month in a row that industrial production fell. It marked the weakest showing since September 2001, when industrial output plummeted 1.1 percent after the shocks of the terrorist attacks in New York, the District and Pennsylvania.
"Manufacturing is on its sickbed and may need stronger antibiotics in the form of tax cuts and more government spending," said Sung Won Sohn, chief economist at Wells Fargo.
In another report, the Labor Department's Producer Price Index, which measures prices of goods before they reach consumers, jumped 1.1 percent in October, after a tiny 0.1 percent rise in September, lifted by higher prices for new cars, trucks and gasoline.
Although October's rise in the PPI marked the largest increase since January 2001, economists said they weren't alarmed. They believed the rise in car and truck prices was temporary and distorted by the annual introduction of new models, which tend to be more expensive.
The surge in gasoline prices in October partly reflected rising fears of war with Iraq that kept crude-oil prices strong. While a dramatic jump in energy costs could derail the economic recovery, many economists did not foresee that happening.
On Wall Street, the Dow Jones Industrial Average closed up 36.96 points at 8,579.09 as investors decided the latest batch of economic news wasn't so bad.
"While the October wholesale price numbers look ugly, they don't imply that inflation is back up and running wild," said economist Joel Naroff of Naroff Economic Advisors.
The core rate of inflation, which excludes volatile energy and food prices, rose by 0.5 percent in October, but most of that increase reflected the higher automobile prices. When those are taken out, the core inflation rate nudged up by 0.1 percent in October.
Against that backdrop, economists said they didn't believe the PPI report flashed a danger signal that the country was on the path to the twin evils of weak economic growth and upward spiraling inflation.
Worried that the economic recovery might be in danger of stalling, the Federal Reserve cut a major interest rate last week by a bold half a percentage point, marking the first rate reduction of this year and the 12th since January 2001.
In a dose of encouraging news, economists said a preliminary report from the University of Michigan showed that consumer sentiment rebounded in November to 85, from 80.6 in October, which raised hopes that consumers will continue to spend and keep the economy's recovery going.
That's particularly crucial given that businesses, worried about the Iraq situation and the turbulent stock market, have been reluctant to increase capital investment, a major factor holding back the national economy and the manufacturing sector.
The Fed's report showed that manufacturing plunged by 0.7 percent in October. The West Coast port shutdown accounted for only a small portion of the decline, the Fed said. Manufacturing's weakness was widespread, with production falling for cars, business equipment, industrial machinery, appliances and furniture.
"Production in 13 of the major 18 manufacturing sectors declined in October," said David Huether, chief economist at the National Association of Manufacturers. "The manufacturing recovery, already sluggish by historical standards, has stalled."
Mining production fell 1 percent in October, as storm-related disruptions in the Gulf Coast region curtailed output of crude oil and natural gas. Utilities output dropped 1.6 percent.
In the PPI report, energy prices galloped ahead by 4.2 percent in October, after a 0.9 percent increase the month before. A 17.9 percent spike in gasoline prices led the way in October.
The price of new cars rose 2.2 percent in October, the biggest increase since September 1990, and new truck prices went up by 1.9 percent, the largest advance since July.
Food prices increased 0.7 percent in October, a big turnaround from a 0.6 percent drop in September.
In another report, business inventories rose 0.5 percent in September as sales fell by the same amount, the Commerce Department reported.


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