INDUSTRIAL OUTPUT SLOWS
CAPACITY UTILIZATION LEVEL FLATTENS
UNEMPLOYMENT CLAIMS IN DOWNTREND
MANUFACTURING FALTERS IN PHILADELPHIA AREA
A SLOWDOWN IN HOME BUILDING

A cursory glance at today's Federal Reserve report on July Industrial Production might lead one to conclude that the economy was slowing down from the brisk pace set in the last quarter. In July, the index of industrial production rose by just 0.1 percent. This followed monthly gains of 0.8 percent, 0.5 percent, and 0.6 percent in April, May, and June. But, looking further into today's report, we find that a 4.3 percent gain in the output of motor vehicles and parts, was mostly offset by a 1.8 percent decrease in the output of utilities. The decrease in utilities output was largely attributed to unseasonally cool weather in the Northeast. Output in other segments of production was unchanged on balance. So, but for the cool weather in part of the country, industrial production in July might have been significantly higher.

The Index of Industrial Production is one of the four indicators that the Commerce Department uses in constructing its Composite Index of Coincident Economic Indicators.

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Along with its monthly report on industrial production, the Fed also releases statistics on capacity utilization -- the percent of the nation's productive capacity that is currently being employed. In July, capacity utilization decreased by 0.2 percent to to 83.2 percent.

In January of 1995, capacity utilization hit a peak of 85.1 percent. Between then and December 1995, the indicator declined steadily to a reading of 82.1. The January-through-July readings, as presented in today's report, were 82.4, 83.3, 82.6, 83.0, 83.2, 83.4 and 83.2. So, for the past six months, capacity utilization has, in effect, been going nowhere.

History has shown that capacity utilization and the unemployment rate are inversely related to one another. When economic activity expands, capacity utilization and employment expand, and the unemployment rate goes down. When economic activity contracts, the opposite is true.

The fact that capacity utilization has gone nowhere lately is consistent with the relatively constant unemployment level in recent months. Together, these two indicators present a picture of a sustained level of ecnomic activity with a "fully-employed" workforce but no pressure to increase productive output.

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In another report today, the Employment and Training Administration of the Department of Labor announced that new claims for state unemployment insurance had risen to 321,000 in the week ending August 10 -- an increase of 5,000. Regardless of this week-to-week rise, the more-smoothly-varying four-week moving average of new claims declined for the fourth straight week to a value of 324,500 -- the lowest level since May 20, 1989. So, all-in-all, the four-week moving average -- one of the eleven components of the Commerce Department's Composite Index of Leading Economic Indicators -- is painting a picture of continuing economic vitality.

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A different, not-so-rosy, picture was painted by the results of the Philly Fed's August survey of area manufacturers. From July to August the index of manufacturing activity in the third district declined all the way from 38.6 to 21.5. On the bright side, the sub-indexes related to inflation both also declined. The index of prices paid by manufacturers to suppliers fell from 12.8 to 4.6. Correspondingly, the index of prices charged for goods sold also dropped, from -0.4 to -3.0.

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Finally, today the National Association of Home Builders (NAHB) reported that rises in interest rates since the first of the year really took a big bite out of their business in August.

Every month the Association polls its members on their perception of the status of current and expected sales, and of prospective-buyer traffic at their sales sites. From July to August the current sales index declined from 64 to 61, the traffic index declined from 49 to 46, and the expected sales index rose from 64 to 65. All three of the indexes have been in multi-month downtrends. The current sales index peaked in May at 66. Expected sales made a double top in April and June at 69. The traffic index peaked in May at 54.

The Association combines the results of three sub-indexes to create an overall index it calls the Housing Market Index (HMI). The HMI peaked at 63 in May, declined to 61 in June, edged another point lower to 60 in July, and then dropped another three points to 57 in August.

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Altogether today's data presents a mixed picture. I would rate the industrial production data as economically favorable, and the behavior of the capacity utilization indicator augers well for continued steady growth. The unemployment claims data indicates that new jobs are still being created. On the other side of the coin, activity in the manufacturing sector in the Philadelphia area contracted dramatically in August. Also, the NAHB report confirms what other reports have been telling us about a slowdown in the economically-sensitive housing sector.

It appears that market participants were not strongly influenced by today's data. The 30-year T-bond ended the day down 7/32. The stock market closed basically unchanged, with the DJIA down a little and the S+P 500 slightly up.