Big industry production surges, business conditions improve

Thursday, June 17, 2004

WASHINGTON -- Big industry production surged by 1.1 percent in May, the strongest performance in nearly six years, and a nationwide survey of business activity showed widespread strength, fresh signs the economy possesses good momentum.

The sizable increase in industrial production reported Wednesday by the Federal Reserve came after a strong 0.8 percent rise in April. The 1.1 percent advance -- better than the 0.6 percent rise that some economists were expecting -- represented the biggest gain since August 1998.

Factory production -- the biggest slice of industrial activity tracked by the Fed -- rose by 0.9 percent in May, up from a 0.7 percent increase the month before.

"They say beauty is only skin deep, but this manufacturing recovery looks better and better the deeper you look at it," said Jerry Jasinowski, president of the National Association of Manufacturers. "There is no doubt that the manufacturing recovery is durable, deep and diffuse," he said.

Output at gas and electric utilities, which increased by 1.5 percent in April, went up by 3.3 percent, reflecting unseasonably warm weather, the Fed said. Mining production, however, dipped by 0.4 percent last month, following a 0.9 percent rise.

In a second report, the Fed said economic activity continued to expand across the nation in April and May, with manufacturing, retailing, residential real-estate markets and bank lending activity faring well.

The job climate also improved, with hiring increasing at a faster pace in most of the Fed's 12 regions, the report said.

Price increases for goods and services geared to consumers were generally modest, the Fed said. However, most Fed regions reported rising prices for certain materials, especially energy related products, building components and steel.

In other economic news, builders broke ground on fewer housing projects in May, but even with the decline the level of activity was quite brisk. Total housing permits were the highest in over three decades.

The Commerce Department reported that the number of residential units underway came in at a seasonally adjusted annual rate of 1.97 million last month. While that represented a 0.7 percent drop from April, the pace exceeded analysts' forecasts.

Total housing permits -- a good barometer of current demand -- rose by 3.5 percent in May to a rate of 2.01 million units, the highest level since February 1973. And permits issued for just single-family homes in May came to a record rate of 1.59 million units.

The trio of reports issued Wednesday suggested that the recovery continues to build momentum. The economy grew at a 4.4 percent annual rate in the first three months of this year and is expected to grow solidly in the current April-to-June quarter, economists say.

With the recovery firmly rooted and the labor market improving, economists widely expect the Federal Reserve to raise interest rates for the first time in four years on June 30.

For nearly a year, the Fed has held a key short-term interest rate at 1 percent, a 46-year low. Most economists believe the Fed will boost rates by one-quarter percentage point in June. A few, however, predict a bigger half-point increase.

Federal Reserve Chairman Alan Greenspan, appearing on Capitol Hill Tuesday, offered an upbeat assessment of the economy and the outlook for job creation. He also held to policy-makers' current forecast that inflation should be relatively contained and thus any interest rate increases ordered by the Fed would be gradual.

If policy-makers' forecasts turn out to be wrong, the Fed will take aggressive action to keep the prices and the economy on an even keel, Greenspan said.

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