August's U.S. Industrial Production Drop Just A "Speed Bump"?

By John S. McClenahen Industrial production in the United States fell 0.3% in August, its first decline since December 2001 and a partial reversal of July's 0.4% increase, reveal the latest monthly data from the Federal Reserve Board. Economists generally were forecasting a 0.2% August gain in industrial production, a closely followed economic measure that includes mining and utilities in addition to manufacturing. Manufacturing output fell 0.1% in August, while production at mines rose 0.8%, the Fed says. The output of utilities was down 2.5% in August. David Huether, chief economist at the Washington, D.C.-based National Association of Manufacturers, contends August's decline in industrial production was a "predictable speed bump." And, he adds, "this confirms my belief that the manufacturing recovery [from the 2001 recession] will continue to run on less-than-all-cylinders until a sustained recovery in business investment takes hold in 2003. However, Bruce Steinberg, chief economist at Merrill Lynch & Co., New York, doesn't believe recovery will take that long. "Third quarter GDP [growth] will probably be above our estimate of 3.5%, requiring a step-up in production," he predicts. Maury Harris, chief U.S. economist at UBS Warburg LLC, also in New York, is of similar mind -- although he's not yet revised his forecast of 2.5% GDP growth for the third quarter. "With retail sales running relatively strong in August . . . and holding their gains in early September, there is no clear case to anticipate further slowing in the factory sector this autumn," Harris says. In decided contrast to Steinberg and Harris is a pessimistic Thomas J. Duesterberg, president and CEO of the Manufacturers Alliance/MAPI, an Arlington, Va.-based business-policy group. Duesterberg characterizes the industrial production numbers as "weak across-the-board," and asserts that "some stimulus in the form of tax relief or interest-rate reduction would be helpful to jump-start a more rapid recovery."

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