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Date Posted: 05:53:40 02/17/03 Mon
Author: February 14, 2003: 2:30 PM EST
Subject: Industrial production posts biggest gain in 2 yearsrose in January

Factory output up, confidence sinks

Industrial production posts biggest gain in 2 years; confidence index off; inventories edge higher.
February 14, 2003: 2:30 PM EST

NEW YORK (CNN/Money) - Industrial production in the United States rose in January at the fastest pace in more than two years, the Federal Reserve said Friday, as the manufacturing sector showed signs of renewed strength amid a sluggish economy.

Other reports weren't quite as upbeat, showing consumer confidence fell in February to the lowest level in more than nine years, and that business inventories edged higher in December.

The confidence numbers were the first downbeat reading after several positive reports on the economy this week that spurred economists to raise their forecasts for growth in the first quarter.

"Most of the (economic) numbers have been decent, but people just can't have a positive view on the economic trends til they can see the other side of these Middle East developments," J.P. Morgan senior economist James Glassman told Reuters.

On Wall Street, stocks managed modest gains in afternoon trading after a choppy morning. Investors were closely watching the report to the United Nations Security Council from chief weapons inspectors about Iraq. Some investors have said the report might push the United States and Iraq closer to war. Treasury bond prices fell.

Uncertainty about what might happen in Iraq has weighed on business confidence in recent months, causing many corporate execs to delay spending or hiring plans.

Most economists think once the Iraq crisis has passed, business activity will pick up again, leading to a new round of hiring, which will increase consumer demand and trigger faster economic growth.

Other economists, however, worry that, even after Iraq, businesses will still be busy cleaning up the excesses of the investment bubble of the late 1990s, meaning growth could be sluggish in the United States for some time to come.

In its report, the Fed's capacity utilization figure was a clear sign businesses aren't using nearly all of their production capacity. With 25 percent of their technology and equipment sitting unused, companies have little reason to want to buy more.

The sluggish business activity has led to another "jobless recovery," similar to the one that followed the 1990-91 recession. Gross domestic product (GDP) is growing enough to fend off a recession, but not enough to create jobs.

A weak job market, combined with falling stocks, worries about Iraq and the possibility of future terror attacks, have conspired to undercut the confidence of U.S. consumers, whose spending makes up more than two-thirds of GDP.

Meanwhile, the closely watched measure of consumer confidence, the University of Michigan sentiment index, fell to 79.2 from 82.4 in January, according to Reuters. Economists, on average, expected a reading of 81.9, according to Briefing.com. It was the worst reading for the index since a 77.9 reading in September 1993.

Even though confidence has been weak, consumers have at least kept spending. But whether that continues remains to be seen.

Separately, U.S. businesses stockpiled goods at a faster-than-expected pace in December as sales moved forward tepidly, a government report said.

Inventories at retailers, manufacturers and wholesalers grew 0.6 percent in December to a seasonally adjusted $1.14 trillion after a revised rise of 0.3 percent a month earlier, the Commerce Department said. December's gain was greater than the 0.2 percent increase economists on Wall Street had expected.

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