WASHINGTON -- The latest snapshots of economic activity Friday gave Federal Reserve policy-makers more reasons to cut interest rates aggressively at their meeting next Tuesday to revive a slumbering economy. Wholesale prices were almost flat in February, and factory production remained in free-fall.
With inflation posing little current risk to the economy, analysts said, the Fed has plenty of room to lower interest rates again. Not only should that give a boost to the overall economy, which is mired in a slowdown, it also should help manufacturing, they said. That sector is bearing the brunt of the economy's weakness, so much so that many believe it is in recession.
"The rot is spreading in manufacturing," said David Wyss, chief economist at Standard and Poor's DRI. "The economy just doesn't seem to be moving."
On Wall Street, stocks tumbled as the anemic industrial production report and profit warnings from major tech companies stoked investors' anxiety over the weak economy. The Dow Jones industrial average lost 207.87 points to close at 9,823.41. That left the index with its worst-ever weekly point drop of 821.21.
Wyss and some other economists said they are betting that the Fed will cut interest rates by a bold three-quarters of a percentage point next week, given the latest reading on inflation and industrial activity as well as the stock market's problems.
"I'd say there is a 60 percent probability of a three-quarter point reduction on Tuesday primarily because of the low rate of underlying inflation, the weakness in the factory sector and the negative feedback that could come from a continued slide in the stock market," said Lynn Reaser, chief economist at Banc of America Capital Management.
The tame inflation news came in a Labor Department report that showed the department's Producer Price Index, which measures inflation pressures before they reach store shelves, edged up a tiny 0.1 percent in February, despite higher prices for natural gas and other energy products.
Excluding volatile energy and food prices, which can swing widely from month to month, wholesale prices fell by 0.3 percent last month, the best showing since August 1993.
But in further evidence of the faltering economy, production at the nation's factories, mines and utilities plunged a bigger-than-expected 0.6 percent, the fifth straight monthly decline, the Federal Reserve said. The weakness was broad-based.
"The bad news for the industrial side of the economy got even worse," said David Orr, First Union's chief economist.
Output at gas and electric utilities decreased by 2.3 percent, which economists attributed to mild weather and conservation efforts by homeowners and others who have been shocked by huge bills. Manufacturing production declined by 0.4 percent and mining output by 0.5 percent.
Operating capacity, meanwhile, fell to 79.4 percent in February as companies cut back production and shed workers due to sagging demand. It was the lowest reading since February 1992.
Industrial production also was weaker in January than the Fed previously thought. Output fell 0.6 percent, according to revised figures, double the 0.3 percent drop originally reported.
The Federal Reserve slashed interest rates twice in January, totaling a full percentage point, trying to stave off recession. One reason cited by Fed policy-makers for being able to act so aggressively was that inflation -- outside the burst in energy prices -- had remained in check.
Wholesale prices were much more subdued in February after skyrocketing energy prices shot them 1.1 percent higher in January, the biggest jump in a decade.
Energy prices didn't go up so much last month, rising 1.4 percent compared with a 3.8 percent January increase. The trend of rising energy costs reflects production limits and strong demand.
Natural gas used in homes rose 3.5 percent in February, but that was an improvement over the record 11.3 percent increase in January. After peaking in December, natural gas prices have eased, and economists expect prices will continue to moderate or fall in coming months.
Falling prices for gasoline and heating oil helped temper rising prices for liquefied petroleum gas, such as propane, and residential electric power.
Food prices also moderated in February, rising 0.6 percent, down from a 0.8 percent increase. Higher prices for pork, chicken, fish and vegetables swamped falling prices for dairy products and fruits.
Car prices, meanwhile, fell 1.5 percent, the biggest decrease since July 1997, and truck prices declined 3.6 percent, the largest drop since October 1982. Economists said the lower prices reflected discounting and other incentives by manufacturers and dealers.
One area of the economy that has held up well during the slowdown has been housing. In another report, housing construction, after rising 4.8 percent in January, dipped by a smaller-than-expected 0.4 percent in February to an annual rate of 1.65 million units. Even with the decrease, the level of activity remained healthy.
"The reality of the economy is not that bad outside manufacturing. But the perception is the sky is falling in part because of the stock market," said Wells Fargo's chief economist Sung Won Sohn, who expects a three-quarter-point cut. "The stock market is the canary in the coal mine, and the canary is gasping for air."
On the Net:
PPI report: http://www.bls.gov/news.release/ppi.toc.htm
Industrial production: http://www.federalreserve.gov/releases/G17/Current/