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Industrial Output in U.S. Declines 0.5% During June

July 16, 1986|ROBERT A. ROSENBLATT | Times Staff Writer

WASHINGTON — The soft spot in the nation's economy--industrial production--fell 0.5% during June, signaling persistent weakness in business activity, the Federal Reserve Board reported Tuesday.

The fourth decline in five months at factories, mines and utilities reflects a sluggish, hesitant mood among executives and consumers alike, according to worried economists.

June's performance was hurt by strikes against American Telephone & Telegraph and in the lumber industry. But last month's drop in output also followed a poor performance in May, when production fell 0.4%. Industrial activity is now lower than it was a year ago.

"The industrial sector is weak; it's on a lackluster path," said Annie Poon, associate economist at Security Pacific National Bank in Los Angeles. She expects modest growth for the rest of the year and some further improvement in 1987.

Lower interest rates and falling oil prices in recent months have failed to give the expected big boost to the economy. Housing starts improved under the impetus of reduced mortgage rates, but lower-cost loans did not spark a big gain in auto sales. And cheap oil has had an immediate, devastating impact on oil-producing states, while its benefits have been thinly spread through the rest of the country.

Retail sales, the best measure of what consumers are doing, rose a scant 0.2% during June, the Commerce Department reported Tuesday. The picture was mixed across the vast spectrum of goods purchased by Americans.

Sales of furniture and building materials declined, as did restaurant income. Department stores and food stores reported sales increases.

The economic recovery, under way since December, 1982, is "getting old," said Jeff Faux, president of the Economic Policy Institute, a liberal Washington research organization. "We can't continue the upward cycle unless it gets some new stimulation.

Jobless Rate Worrisome

"We are still not producing what we should produce to get the unemployment rate down," he said. The jobless rate is 7%. "Consumers are really practically at their (debt) limit," Faux said.

The economy may be helped over the long run by cheaper money and cheaper oil, but the benefits have not come as soon as the experts had anticipated.

Meanwhile, manufacturing "is bearing the brunt of the current slowdown in the economy," said Jerry Jasinowski, chief economist for the National Assn. of Manufacturers.

"While some of the decrease in industrial production is attributable to one-time factors such as strikes, there are more fundamental sources of industrial weakness," he said.

The production of machinery and equipment for business use "has been poor because investment is being held back by widespread under-utilization of capacity and the uncertainty of tax reform," according to Jasinowski.

Manufacturing declined 0.5% during June, largely because of a plunge in the making of durable goods--equipment built to last more than three years. Production of defense and space equipment rose a slight 0.1%. The output of construction supplies fell 0.1%.

The biggest losses, an output decline of 1.5%, came in the mining category, which includes oil and gas drilling. Petroleum prices have fallen to 1975 levels, causing a drastic reduction in the number of drilling rigs at work.

If debt-laden consumers are not stimulating the economy, the job must be done by corporate spending for new machinery. But business investment, too, seems to be sluggish, perhaps because executives see low consumer demand or perhaps because of confusion over the final form of new tax legislation.

U.S. industry also is suffering because the long-awaited improvement in the trade deficit has not happened. The dollar has fallen sharply in relation to the West German mark and the Japanese yen, making products from those nations more costly to American consumers. And U.S.-made goods, in turn, become more competitive in world markets.

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