Originally created 08/15/98

Asia, GM strike pound industrial production



WASHINGTON -- The combination of the Asian crisis and the General Motors strikes pounded the nation's industrial production for the worst two-month decline since the start of the 1990-91 recession.

On the bright side, weakness spilling from Asia helped keep a lid on prices charged by factories and other producers. They rose a modest 0.2 percent in July, the Labor Department said Friday.

"With Asia down for the count and much of the rest of the world wobbling, this comes as no surprise," said economist Oscar Gonzalez of John Hancock in Boston. "This means U.S. consumers will continue to benefit from low inflation."

Production at factories, mines and utilities fell a seasonally adjusted 0.6 percent last month, on top of a 1.1 percent plunge in June, the Federal Reserve said. It was the largest two-month drop since November-December 1990.

In this case, much -- though certainly not all -- of the weakness was temporary. GM strikes idling more than 190,000 workers began early in June and ended late in July. Motor vehicle output dropped from an annual rate of 12.4 million in May to 8.3 million in July.

But even excluding autos, industrial production would have edged up only 0.1 percent in July after declining 0.4 percent in June.

"Over the last six months, factory production excluding automobiles has been flat," said economist Stan Shipley of Merrill Lynch. "July's slowdown in production was widespread."

A third factor depressing production is a buildup in inventories of unsold goods early in the year. So, companies in the spring and summer have produced far fewer goods for inventory.

Reflecting that, the Commerce Department said business inventories rose 0.1 percent in June after no change in May. Automobile inventories fell 3 percent, the largest drop since 1991.

Fear that spillover from Asia will curb growth in corporate profits is worrying stock investors. The Dow Jones industrial average extended its losses Friday. It fell 34.5 points to close at 8,425, bringing the decline since its July 17 peak to 9.8 percent.

The silver lining is muted inflation. Even with July's small seasonally adjusted increase, the Producer Price Index for finished goods fell at a 0.3 percent annual rate during the first seven months of the year.

Last month, food prices rose a brisk 0.4 percent and energy prices, 0.3 percent. Excluding those two volatile categories, prices edged only 0.1 percent higher.

Drought in the South parched vegetable crops and their price jumped 21.3 percent, the largest rise in 16 months. The cost of tomatoes surged 130 percent and green-pepper and eggplant costs each rose more than 80 percent.

Fruit prices, however, fell 1 percent, pulled down by large decreases for nectarines.

Meat prices declined too. Beef edged 0.1 percent lower on top of a 2.6 percent drop in May. Rather than care for cattle through the heat wave, farmers are sending them to slaughter before they lose the weight they gained over the mild winter.

Pork prices plummeted 10.9 percent, the largest drop in 22 years.

"There's no question Asia is an issue. Asians are buying less pork," said economist Donald Ratajczak of Georgia State University.

Energy prices rose a moderate 0.3 percent, despite a 1.3 percent drop in the cost of gasoline. The increases came in residential electricity, 1.1 percent, and residential natural gas, 0.4 percent.

Prices outside food and energy would have been unchanged instead of up slightly if not for a 1.7 percent rise in prescription drug prices. They were up 22.3 percent for the 12 months ended in July. That was being skewed, the Labor Department said, by "changes by a small number of producers for a small number of individual drugs."

Meanwhile, passenger car prices rose 0.8 percent in July as dealers ended discount programs. For the year though, they're up just 0.2 percent. Computer prices, down 1.6 percent for the month, continued their decline. Tobacco costs were unchanged, after rising steeply earlier in the year.

Children's clothing prices plunged 4.5 percent, again reflecting Asia.

"That's a highly unusual drop for that category," Ratajczak said.

The price of intermediate goods was unchanged in July while crude-good costs fell 1.8 percent. An example of the three processing stages is bread for finished, flour for intermediate and wheat for crude goods.