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Industrial growth slowed in August


(Photo Credit: Susana Gonzalez/Bloomberg)

By Neil Irwin

The pace of growth in the industrial sector slowed in August, according to new data -- the latest sign of a recovery that is decelerating.

Industrial production rose 0.2 percent last month, compared with a revised 0.6 percent in July, the Federal Reserve said Wednesday. The Fed had earlier estimated that output by the industrial sector rose 1 percent in July.

The slowdown was caused in large part by cutbacks in auto production; output in that sector fell 5.2 percent, the Fed said. Also, production of appliances, furniture, and carpeting fell 2.1 percent, reflecting a slowdown in home sales activity.

The August number was in line with analysts' expectations and consistent with the view that the economic expansion has shifted into a period of tepid growth. Forecasters expect overall growth in the third quarter, which ends Sept. 30, to be below 2 percent at an annual rate, which would be too weak to bring down the jobless number.

Still, the modest growth in industrial production was evidence that the economy is not dipping into a new recession, or extended period of contraction. Capacity utilization in the nation's industrial sector edged up to 74.7 percent, from 74.6 percent

The manufacturing sector increased output at 0.2 percent, while output rose 1.2 percent in the mining sector and fell 1.5 percent for utilities.

By Anne Bartlett  | September 15, 2010; 9:40 AM ET
Categories:  Auto industry, Federal Reserve, U.S. Economy  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Morning briefing: WTO ruling expected in Boeing dispute, U.K. unemployment claims rose unexpectedly
Next: Dueling trade stats: Chamber of Commerce vs. Trade Watch


The conventional wisdom is that the momentum of even a modest recovery should be enough to sustain slow growth. This wisdom does seem to have a good chance of being right. Slow growth has the large advantage that it poses no requirement on the Fed to slow it down and end this cycle. So it could go on for a long time. It is likely this scenario is the best possible outcome.
The worst would be a sudden unsustainable boom that the Fed had no choice but resisting. That scenario would lead first to big losses to bondholders from rising interest rates and probably later to another major stock market crash. There is likely already plenty of money in the system to finance this kind of boom if the animal spirits ever took hold. There are also many who are pressing to pump more and more money into the system until some weak point can be found that can't resist the pressure for another bubble. Hopefully, this scenario can be resisted and it would surely take a year or two to develop in any case.
There are two other realistic scenarios for another downturn. One is an external shock. Clearly the instability of the European financial system is one possible source. Another is China. China apparently is also in the stage of the cycle where a massive stimulus has to be withdrawn. Everyone is sure that China is in great shape and they may turn out to be right. But it is hard to have much confidence in judgements about an economy that we know so little about.
The last problem scenario is the possible effect of poor US government policy decisions. Trying to solve our problems by stimulating our already excessive demand for ever more consumption is one. Fisically irresponsible tax cuts is another. In the comimng political environment in Washington, it is quite possible that some more bad policy choices will be found.
Most likely, the bigger problem scenarios require some significant time to develop. But we learned from the fall of 2008 that big surprises are possible.

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