Finance Blog number 1

Reports on industrial production and consumer prices today showed the U.S. economy is emerging from the economic slump without spurring inflation.

Output at factories, mines and utilities climbed 0.8 percent last month, exceeding the median estimate of economists surveyed by Bloomberg News, data from the Federal Reserve in Washington showed. The Labor Department said the cost of living climbed 0.4 percent, and was down 1.5 percent from August 2008.

Stocks rose, extending a global advance, after the reports underscored Fed Chairman Ben S. Bernanke’s view that the worst recession since the 1930s was probably over. A lack of price pressures means policy makers, meeting next week, can continue to leave the benchmark interest rate near record-low levels to give the economy time to gain speed.

“You’re getting growth with really no inflation,” said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “With the Fed out of play, it’s really a good combination for investors.”

The Standard & Poor’s 500 index increased 1.5 percent to close at 1,068.76. The MSCI World Index of 23 developed nations climbed to the highest level in almost a year. Equities also got a lift from Warren Buffett, who said the U.S. economy has “hit a plateau at bottom.” The billionaire investor last year called the financial crisis an “economic Pearl Harbor.”

Gaining Confidence

Another report today showed an index of homebuilder confidence climbed in September for a third consecutive month. The National Association of Home Builders/Wells Fargo’s measure climbed to 19, the highest level since May 2008, from 18 in August, the Washington-based group said. A reading below 50 means most respondents view conditions as poor.

Economists forecast industrial production would rise 0.6 percent, according to the median of 75 projections in a Bloomberg News survey. The Fed revised July’s increase up to 1 percent from the previously reported 0.5 percent. The back-to- back gain was the biggest since late 2005.

More production was helping to soak up excess capacity. The amount of industrial volume in use increased to 69.6 percent, the highest level since February.

Decreasing slack is among the reasons analysts are less concerned over the prospect of deflation, or a broad-based drop in prices that hurts the economy.

Deflation Threat

“The deflation trend is in the process of passing us, but we’re not completely there,” Ward McCarthy, chief financial economist at Jeffries & Co. Inc. in New York, said in an interview on Bloomberg Radio.

A 5.5 percent increase in the production of motor vehicles and parts led last month’s gain in output, the Fed’s report showed.

The Obama administration’s “cash-for-clunkers” trade-in program boosted auto sales in August, indicating automakers are likely to continue to gear up because of lean inventories and increasing demand.

General Motors Co. last month called back 1,350 union workers, its biggest one-time increase in jobs since 2006, as it boosted second-half production, in part because of the federal subsidies free credit report and score.

Factory output, which accounts for about four-fifths of industrial production, increased 0.6 percent after rising 1.4 percent the prior month. Excluding automobiles, manufacturing climbed 0.4 percent, indicating the gains were broad-based.

Exports

Foreign demand as the global economy recovers may also be helping U.S. factories. Exports rose 2.2 percent in July, according to a Commerce Department report released Sept. 10.

The department today also reported the U.S. deficit in the current account, the broadest measure of trade because it includes transfer payments and investment income, narrowed in the second quarter to the lowest level since 2001.

There are “signs of improvement” in the global economy, 3M Co. Chief Executive Officer George Buckley said in an interview on Sept. 5. Job cuts at the St. Paul, Minnesota-based company are mostly complete and it will step up investments in research and development, he said.

The Labor Department price report today also showed prices excluding food and energy increased 0.1 percent, matching expectations. They were up 1.4 percent from a year earlier, the smallest gain since February 2004.

The increase in the cost of living reflected a 4.6 percent jump in energy prices in August. Food prices, which account for about a seventh of the CPI, increased 0.1 percent in August, the smallest gain since January.

Food Prices

Companies such as Kroger Co. are keeping a lid on prices to revive demand as the economy starts to emerge from the recession. The largest U.S. supermarket chain yesterday reported second-quarter profit that fell more than analysts’ estimates as prices for some products, particularly produce and dairy, decreased more than expected.

“Most of us have never seen a selling environment like now,” Chief Executive Officer David Dillon said on a conference call, adding that prices will continue to decline over the next several quarters.

New vehicle prices plunged 1.3 percent, the biggest drop since 1972. The Labor Department said it considered the cash- for-clunkers initiative as a discount off purchase prices, contributing to the drop. The program gave buyers as much as $4,500 for trading in older models for new, more fuel-efficient autos.

Fed Action

Fed policy makers on Aug. 12 committed to keeping the key interest rate between zero and 0.25 percentage point “for an extended period” to promote economic recovery. They said they expected “inflation will remain subdued for some time.”

Former Fed Chairman Alan Greenspan, speaking yesterday to an investor conference, said inflation will continue to cool until next year.

“We’ve got worldwide disinflation in train and it will continue for a short while,” he said. “By the early months of next year the rate of inflation will fall below 1 percent on an annual rate” before starting to climb.

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