Thursday, July 17, 2003

Two economic signs point to better times

By Jeannine Aversa
The Associated Press

WASHINGTON - Consumer prices rose modestly in June and manufacturers boosted production by the largest amount since the beginning of the year, a pair of hopeful signs for the economy's revival.

The 0.2 percent advance in the Labor Department's consumer price index for June was the first increase since March and eased - but didn't erase - concerns that the country could be headed for deflation, an economically dangerous long-term slide in prices, analysts said. Consumer prices decreased by 0.3 percent in April and were flat in May.

A report from the Federal Reserve showed that factory output increased by 0.4 percent in June, the second month in a row that production went up and the best showing since January.

Automobiles, home electronics, furniture and chemical products each posted production gains in June, encouraging news for the nation's manufacturers, which have been hardest hit by the economy's woes.

The latest batch of economic reports released Wednesday "raised hopes that the economy is getting back on a healthy, noninflationary growth track," said Ken Mayland, president of ClearView Economics.

Wednesday's consumer price index report "really does validate the Fed's view that it can keep interest rates low for some time without worrying too much about inflation," said Stephen Cecchetti, economics professor at Brandeis University.

Excluding energy and food products, "core" consumer prices held steady in June, after rising by 0.3 percent in May, suggesting that prices for other goods and services are largely under control, economists said.

The increase in consumer prices in June largely reflected a 0.8 percent rise in energy costs, which had fallen by 3.1 percent in May.

Energy prices are rising in part on fears that the oil-producing nations might cut production levels for crude oil. But for natural gas, shortages are the problem. Natural gas prices rose 3 percent and gasoline prices went up 1.3 percent in June.

Food prices, meanwhile, increased 0.4 percent last month, following a 0.3 percent advance.

The Federal Reserve on June 25 cut its target for a key interest rate by one-quarter percentage point to 1 percent, a 45-year low.

The Fed reduced the target to rev up economic growth to prevent deflation.

Economists think that the Fed probably will hold rates steady at its meeting Aug. 12.

By then, the combination of President's Bush latest round of tax cuts and super-low interest rates should help perk up the economy by motivating consumers and business to spend and invest more, economists said.

The Fed's manufacturing report raised hopes that the seeds to a stronger second half are being sown.

"Business is starting to pick up," said David Huether, chief economist at the National Association of Manufacturers. "Conditions are beginning to improve broadly for manufacturers."

Overall industrial activity, which includes not only factories but also mines and utilities, rose by 0.1 percent in June for the second straight month, the Fed said. Mining output went up 1 percent, while production at gas and electric utilities dropped 3.5 percent, reflecting unseasonably cool weather.

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