WASHINGTON -- Industrial output grew more than expected in July, led by a surge in big-ticket consumer goods such as appliances, the Federal Reserve reported yesterday.
The report showed that economic growth may not be slowing quite as fast as previously thought and business confidence in consumer demand remains strong, analysts said.
"The industrial sector remains robust," said Daryl Delano, senior economist of Cahners Economics Inc. in Newton, Mass.
The combined output of factories, mines, and utilities grew 0.2% in July, the Fed said. The gain would have been double that except for a dropoff in electricity generation from unusually high levels in June and strikes at Caterpillar Inc. and three tire makers, the Fed said.
Analysts had .expected industrial production to remain flat in July, following a 0.5% gain in June and a 0.3% increase in May, which was revised upward.
The Federal Open Market Committee meets today to review monetary policy. Economists generally expect the panel will vote to raise short-term interest rates for the fifth time this year.
"It's unthinkable that the Fed won't move," said Nancy Kimelman, chief economist of Technical Data in Boston.
Yesterday's report is unlikely to have much of an effect on what Fed officials decide to do today because it is just one more piece of conflicting evidence regarding where the economy is headed, analysts said.
For example, weaker consumer spending in the second quarter and rising inventories hinted at slower growth ahead, while strong job growth and demand for consumer credit tell a different story, they said.
Many economists say the Fed should raise the federal funds rate by 50 basis points to 4.75%, but they lament that Fed officials may very likely hike rates by only a quarter of a point.
"The economy is on a firm enough footing to absorb a 50-basis point hike," said Dan Seto, an economist with Nikko Securities Company International. "But the Fed may drag its feet." Also according to yesterday's report, factory output grew 0.4% in July thanks primarily to a 0.9% increase in the production of consumer durable goods -- partially offset by a 3.1% drop in auto production -- and a 0.5% gain in business equipment.
"The 0.2% gain in total production was on the high side of expectations, but the 0.4% increase in manufacturing was even more impressive," Seto said.
The report suggests that businesses aren't backing off from higher production levels despite weaker consumer spending last quarter and rising inventories, Seto said. And Delano said July's strong gain in consumer durables production suggests that the inventory buildup in the second quarter was primarily planned for by businesses and not accidental.
But he cautioned that it does not matter whether higher inventory levels are wanted or unwanted if consumers down the road don't spend enough to reduce those stocks.
Yesterday's report also said the operating rate of the industrial sector remained at 83.9% in July, which is a five-year high. The capacity use rate of factories inched up a 101h of a point to 83.1%, while the operating rates of mines and utilities fell, the report said.