U.S. Economic Risks Remain On The Downside

By John S. McClenahen Prices at the wholesale level unexpectedly surged 1.1% in October, more than five times more than the 0.2% rise that economists generally had expected. Rising prices for gasoline, light trucks and autos led the way. The unadjusted Producer Price Index (PPI), compiled by the U.S. Labor Department, stands at 140.6 (1982 = 100). Although some executives and economists will now point to the PPI with renewed concerns about inflation, one month's PPI numbers do not constitute a trend. "Excluding food, energy and motor vehicles, the PPI was up just 0.1% [from September] and 0.2% from a year ago," notes Gerald D. Cohen, a senior economist at Merrill Lynch & Co., New York. Indeed, data on U.S. business inventories and industrial production, also released on Nov. 15, show anything but an overheating U.S. economy during September and October. The U.S. Commerce Department reported that business inventories, not including semiconductors, expanded half a percentage point in September to month-end level of $1.31 trillion. While the increase was more than double the 0.2% economists generally expected, it was, says Merrill Lynch's Cohen, a reflection of wholesalers and retail outlets rebuilding stocks from low levels. "Manufacturing inventories were unchanged," he points out. In October, U.S. industrial production -- which in addition to manufacturing includes mining and utilities -- fell 0.8%, the U.S. Federal Reserve said. Manufacturing output alone fell 0.7%, its third consecutive monthly decline. "Three consecutive months of declining output clearly signal that the manufacturing recovery, already sluggish by historical standards, has stalled," states David Huether, chief economist at the Washington, D.C.-based National Association of Manufacturers. "Also troubling is the dispersion of the decline in manufacturing output last month," Huether adds. "Production in 13 of the 18 major manufacturing sectors declined in October." The U.S. factory operating rate was 73.5 in October, down six-tenths of a percentage point from September and a significant 7.4 percentage points below its 1967-2000 average of 80.9%.

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