American factories increased their production in July after eight straight months of declining output, providing the most solid evidence to date that the moribund manufacturing sector may finally be on the mend.
At the same time, inflation remained subdued last month, easing fears — at least for now — that prices would shoot up when the recovery takes hold. Consumer prices were unchanged from June and declined by 2.1 percent compared to July 2008, mostly because of the steep fall in the price of gasoline.
With prices held in check, inflation-adjusted wages increased last month for the first time this year.
“The July rebound in production and real wages with stable prices is the sort of good news we have been waiting — and waiting — to see,” said Charles McMillion, chief economist of MBG Information Services. “This does not necessarily mean the economy is growing again, but it is the kind of development that is necessary before growth can begin.”
With inflation under control for now, the Federal Reserve has not felt compelled to tighten monetary policy by raising interest rates, thus providing yet another spur to economic activity, analysts said. Down the road, however, after a recovery takes hold, most analysts expect inflation to spike and the Fed to move into action.
Automakers led last month’s bounce in industrial production. They reopened after their midyear retooling shut-downs and increased their output to meet consumer demand fueled by the federal “cash-for-clunkers” program.
Output from the nation’s factories, mines and utilities increased 0.5 percent in July, the Fed reported Friday.
Auto production soared by more than 20 percent last month, but it was still 32 percent below July 2008 levels.
The increase in industrial output indicates that the long-awaited economic recovery could arrive during the second half of this year, as many economists have projected.
July’s rise in industrial production “is consistent with our forecast for a second-half recovery,” said Tim Quinlan, an economic analyst at Wells Fargo Securities.
Even if the economy turns upward, however, the Fed warned Wednesday that “economic activity is likely to remain weak for a time.”
Manufacturing output, the biggest component of industrial production, increased 1 percent last month after having plunged 17.4 percent since the recession began. Factory output was still nearly 15 percent below July 2008 levels.
Mining output advanced 0.8 percent in July, the Fed reported, while utility production declined 2.4 percent.
Meanwhile, the nation’s cost of living, measured by the consumer price index (CPI), was unchanged in July following a 0.7 percent increase in June, the Labor Department reported Friday.
The 2.1 percent decline in prices was the biggest 12-month drop since January 1951. A year ago, consumer prices had jumped 5.6 percent, the biggest 12-month rise since January 1991, according to Labor Department data.
The jump in inflation a year ago was the product largely of soaring oil prices, which have plunged from their record-breaking levels in mid-2008, causing overall inflation over the past 12 months to turn negative.
The so-called “core” CPI, which excludes price changes in the volatile energy and food sectors, increased just 0.1 percent last month, and has risen 1.5 percent over the past year.
In its statement following its interest-rate policy committee meeting this week, the Fed said, “Substantial resource slack is likely to dampen cost pressures, and the committee expects that inflation will remain subdued for some time.”
U.S. businesses have huge amounts of excess capacity following the plunge in output that has occurred during the deepest recession since the Great Depression.
Capacity utilization edged higher in July, rising to 68.5 percent from 68.1 percent, which was the lowest level ever reached since record-keeping began in 1967, the Fed reported.
With an unemployment rate of 9.4 percent in July and an estimated 14.5 million Americans out of work, the labor market also has a lot of slack.
“The core CPI is quiet and there is so much slack in the economy that it should remain so,” said Nigel Gault, chief U.S. economist at IHS Global Insight. “As a result, the Fed does not need to rush to tighten monetary policy. Inflation is a potential threat, but for some way down the road, not today.”
The Fed noted Wednesday that household spending “remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit.”
Those factors contributed to another decline in consumer confidence. The Reuters/University of Michigan preliminary index of consumer sentiment, which was released Friday, unexpectedly fell in August for the second month in a row as households expressed concern over jobs and wages.
The consumer confidence index declined from 66 in July to 63.2 in August.
Retail sales also unexpectedly fell 0.1 percent in July despite the jump in auto purchases, the Commerce Department reported Thursday.
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