Production Surge Strains System Increase Could Lead To Inflationary Bottlenecks At Factories

A surge in industrial output last month increased the strain on U.S. factories, mines and utilities to the highest level in two years.

Industrial production jumped 0.9 percent in March, the largest increase in 11 months, the Federal Reserve said Wednesday.

That raised the operating rate at industrial firms to 84.1 percent, the highest since March 1995 and nearing the 85 percent benchmark many economists believe signals the development of inflationary production bottlenecks.

The report temporarily ruffled financial markets by suggesting the Federal Reserve, which tightened monetary policy last month, would raise short-term interest rates several more times through the summer.

However, the Dow Jones average of industrial stocks followed up its second-biggest gain ever on Tuesday, 135 points, by climbing an additional 92.71 points to close at 6,679.87

“The continued strength in production last month, coupled with other recently reported data, … leaves us with the impression the Fed will raise rates by another quarter of a percentage point at its May 20 meeting,” said economist Marilyn Schaja of Donaldson, Lufkin & Jenrette in New York.

Separately, the Commerce Department said builders started construction on fewer new homes in March than the month before.

Housing starts dropped 6.4 percent, the worst decline in three months, to a seasonally adjusted annual rate of 1.42 million units. The February level, a rate of 1.52 million units, was the highest in nearly three years.

Economist David Seiders of the National Association of Home Builders said the decline reflected the fact that mild weather in February prompted builders to start work on some units that normally would have waited until March.

Also, mortgage interest rates, which bottomed in February, started drifting higher last month in anticipation of tightening from the Fed. Rates now are averaging above 8 percent for the first time since early October.

“Rising mortgage rates will contribute to an orderly slowdown (in construction) this year,” Seiders said. He said he expected about a 4 percent decline from last year’s eight-year high of 1.48 million starts.