Factory Output Hits 2-Year High But Increase Shouldn’t Cause Fed To Boost Interest Rates

American industry’s output soared 0.8 percent last month, pushing the strain on factories, mines and utilities to the highest level in more than two years.

Normally, that would ring alarm bells on inflation-wary financial markets and at the Federal Reserve, where policy-makers are scheduled to meet today to decide whether to raise or lower interest rates.

But not this time. The reason: Asia. The unraveling of the Asia economic miracle means U.S. companies are losing valuable export markets. And they face intensified competition from Asian manufacturers willing and able, because of sharp currency devalutions, to sell their products cheaply in the United States.

Most economists believe the disinflationary implications of what’s happening in Asia will cause the Fed to hold interest rates steady into early next year. The central bank hasn’t changed the benchmark rate on overnight loans between banks - now at 5.5 percent - since late March.

Wall Street appeared free of Asian jitters Monday for the first time in a week. Helped by gains in South Korea’s financial markets, the Dow Jones average of industrial stocks rose 84 points to close at 7,923.

In its report Monday, the Federal Reserve said U.S. industry’s operating rate increased from 82.9 percent in October to 83.2 percent in November, the highest level since September 1995. But that doesn’t carry the inflation worries that it normally would, analysts said.

To put the number - reported Monday by the Federal Reserve - in perspective, use of capacity averaged 82.1 percent from 1967 to 1996. It sank as low as 71.1 percent after the recessions of the late 1970s and early 1980s and climbed as high as 85.4 percent at the end of the boom of the late 1980s.

Economists said they wouldn’t be surprised to see capacity use fall next year, for two reasons. First, U.S. corporations have been on an investment binge, buying everything from computers to production machinery. That has resulted in a big 4.7 percent increase in their capacity to produce over the past year.

Secondly, the robust production increases are coinciding with slacker domestic demand.

Retail sales rose lethargically in November after slipping in October and September. That probably presages an unwanted buildup of inventories of unsold goods.

“Can the manufacturing sector continue to grow this rapidly?” asked economist Mark Vitner of First Union Corp. of Charlotte, N.C. “The answer is almost certainly no.”

Monetary policy-makers also are assessing the inflationary implications of another sort of capacity constraint - a shortage of qualified workers. The nation’s unemployment rate hit a 24-year low of 4.6 percent in November and wages over the past year have risen more than 4 percent - the best in eight years.

The November production advance was the sharpest since July and marked the 20th month without a decline. It was propelled by increases in the output of autos and light trucks, up 5.5 percent; semiconductors, up 2.5 percent; and computers, up 1.8 percent.

Output of appliances, carpeting, furniture, aircraft, chemical products, construction supplies, lumber, electrical machinery and food products rose, too.

Production at factories alone rose 1 percent, the best gain since April 1996. Output at mines and oil wells fell 0.2 percent and at utilities, 0.9 percent.