U.S. Economy: Production Up, Prices OK

U.S. factories made more cars, clothing and other goods than expected in August, and inflation remained in check in the early stages of a broad economic recovery.

The Federal Reserve said Wednesday that output at the nation's factories, mines and utilities rose 0.8 percent in August. Economists surveyed by Thomson Reuters expected a 0.6 percent increase. Last month's gain marked the second straight increase after the global recession dried up the appetites of customers worldwide.

Fed Chief: Recession Likely Over

The Labor Department reported that the so-called "core" Consumer Price Index, which excludes volatile food and energy prices, rose slightly over the 12 months ending in August, but is well within the Fed's comfort zone. That means the central bank faces little pressure to raise its benchmark interest rate, a step it takes to ward off high inflation. The Fed has reduced the interest rate it charges banks for overnight loans to record low of nearly zero in an effort to revive the economy.

Factories boosted production of cars, machinery, food products, clothing and other goods in a fairly broad-based pickup in August, according to the Fed data. The central bank also said industrial production jumped 1 percent in July, twice as much as originally reported. Car production drove that gain.

Production at factories - the single-biggest slice of overall industrial activity - also rose for the second straight month. It posted a 0.6 percent gain in August, following a 1.4 percent rise in July.

Car production led the way, rising 5.5 percent last month due mainly to the government's Cash for Clunkers program. That followed a whopping 20.1 percent gain in July as General Motors and Chrysler reopened many plants that had been closed in May and June as the companies restructured and emerged from bankruptcy.

Even with production of autos and parts stripped out, manufacturing activity increased 0.4 percent last month.

On the inflation front, the CPI rose 0.4 percent in August, after a flat reading in July. Wall Street economists expected a 0.3 percent increase, according to a survey by Thomson Reuters. Prices fell 1.5 percent in the past year, as gas prices dropped sharply from record levels last summer.

The core price index rose 0.1 percent, matching expectations. It rose 1.4 percent in the 12 months ending in August, the smallest increase in more than five years.

A 1.3 percent drop in the price of cars last month, the steepest fall in nearly 37 years, held back the core index. Discounts stemming from the clunkers program - which provided rebates of up to $4,500 to consumers who traded in older cars for newer, more fuel-efficient models - caused the decline.

Gas prices rose 9.1 percent in August on a seasonally adjusted basis and accounted for 80 percent of the rise in the consumer price index. Still, gas prices are 30 percent below last year's record levels, when prices at the pump topped $4 a gallon.

Consumers have cut sharply back on their spending in response to the worst recession since the 1930s. That has made it difficult for retailers and manufacturers to raise prices, keeping inflation at its lowest levels in decades. Last month, the department said consumer prices fell 2.1 percent in the 12 months ending in July, the steepest drop since 1950.

Still, there are signs the economy is recovering and consumers may be willing to spend again. Retail sales jumped 2.7 percent in August, the Commerce Department said Tuesday, the biggest increase in more than three years.

With production rising, industrial companies idled less of their plants and equipment in August. The overall operating rate rose to 69.6 percent in, up from 69 percent in July.

Still, industrial companies are operating well below capacity. The operating capacity in August was 11.3 percentage points below its average between 1972 and 2008. A healthy level is around 80 percent.

Because companies still have a lot of their plants unused, that also will be a force tamping down any inflation pressures.

Fed Chairman Ben Bernanke said Tuesday the recession is likely over, though he noted that the economy isn't likely to grow fast enough to lower unemployment anytime soon. Most economists expect the jobless rate to top 10 percent next year, up from its current 9.7 percent.

"It's still going to feel like a very weak economy for some time," Bernanke said.