WASHINGTON - Reports on U.S. productivity and industrial production yesterday drew mixed reviews from analysts on whether the new information reinforces or weakens concerns about higher inflation.
The Federal Reserve yesterday reported that the industrial sector operated at 83.5% of capacity in May, down a notch from 83.6% in April. It was the second straight monthly decline from a peak of 83.7% in March.
Separately, the Labor Department reported that nonfarm productivity in the first quarter advanced at a 1.3% annual rate, previously reported as growing at a slim 0.5% pace. The revised gain is in line with the 1.4% increase reported for all of last year.
Economists in general view declining capacity use and advancing productivity as noninflationary.
"Both reports were mildly favorable for a steady noninflationary growth outlook," said Sam Kahan, chief economist of Fuji Securities Inc. in Chicago.
Russell Sheldon, an economist with Mellon Bank in Pittsburgh, concurred saying, "These reports tell us that there isn't any problem with inflation now and there won't be in the future."
However, other analysts viewed the reports as more negative than positive regarding future inflation.
"These were not particularly friendly reports for the bond market," said Dan Seto, and economist with Nikko Securities Co. International.
The decline in the operating rate was "somewhat misleading" because it was skewed by big declines by automakers and utilities, Seto said. In fact, more individual industrial sectors posted gains in capacity use in May than those showing a decline, according to the Fed's report.
"The pressure remains quite intense," Seto said. He noted that the labor market, another key factor regarding inflation, continues to tighten up.
But Sheldon said the drop in capacity use should "be taken at face value" because surging auto production late last year and early this year pushed the overall operating rate up so high in the first place.
Michael Niemira, an economist with Mitsubishi Bank, said the reports did not shake his view that inflation would likely pick up around the end of the year. He also predicted that productivity growth would likely slow in the second quarter because the number of hours worked seems to be growing faster than gross domestic product.
In general, economists are reluctant to draw too many conclusions from one quarterly productivity report because the statistical series is very volatile. Productivity surged at a 6.1% annual rate in the fourth quarter of last year, but only gained 1.4% for the year as a whole.
In addition, the link between productivity and inflation in the short-term is very weak.
Historically, annual productivity growth tends to average about 1.5%. But over the last three years, annual productivity growth has averaged slightly more than 1.8%.
Kahan noted that it is difficult to tell whether the above-average growth of the past few years was caused by the business cycle or some longer-term phenomenon that would also bode well for future productivity. "If this is merely a cyclical burst, then our best gains may be behind us," he said.
The Fed also reported that industrial production grew 0.2% in May, which is slightly higher than expected. But production in April was revised down to a 0.1% increase, previously reported up 0.3%.