U.S. Economy: June Producer Price Index, Production Fall

July 15 (Bloomberg) -- U.S. producer prices fell the most in more than a year in June and industrial production declined for the first time since March, reinforcing that the Federal Reserve may keep a ``measured'' approach to monetary policy.

Prices paid to producers fell 0.3 percent last month, reflecting cheaper energy, after a 0.8 percent rise in May, the Labor Department said in Washington. Industrial production declined 0.3 percent as automakers turned out fewer cars because of a slowdown in sales, Fed figures showed.

Central bankers described the acceleration in inflation earlier this year as ``transitory'' and said interest rate increases will come at a ``measured'' pace unless price gains become more pervasive. The Labor Department is forecast to say tomorrow that consumer prices rose 0.2 percent in June, and Fed Chairman Alan Greenspan delivers the Fed's revised outlook on inflation to Congress next week.

``We expect the Fed to continue normalizing the fed funds rate gradually over the rest of the year,'' said Peter Kretzmer, senior economist at Banc of America Securities LLC in New York.

The Federal Reserve Bank of New York said its index of manufacturing in the state unexpectedly increased to 36.5 in July, the second-highest this year, from 29.9. Zero represents the point between expansion and contraction in the gauge, which has been above 30 for eight of the last nine months.

Initial jobless claims rebounded last week by 40,000 to 349,000, the government said, adding that the last two weeks have been distorted because of difficulties adjusting for seasonal shutdowns at auto plants.

`Solid Growth'

The 4 3/4 percent Treasury note maturing in May 2014 was unchanged and yielding 4.48 percent at 10:49 a.m. New York time. The Dow Jones Industrial Average and Standard & Poor's 500 Index also were little changed.

Pittsburgh-based PPG Industries Inc., the world's second- biggest maker of car paint, expects the economy to accelerate after slowing in the second quarter, Chief Financial Officer William Hernandez said.

``We will be surprised if we don't see continued solid growth,'' Hernandez said today as the company reported that second-quarter profit rose 20 percent. ``Even if the slowing continues, it can add to the sustainability of the recovery'' by giving companies time to catch up to demand, he said, adding that ``we don't believe that the economy will grow at a straight-line rate.''

Factory orders have fallen two straight months and employment in June fell for the first time since the beginning of the year, suggesting growth in the manufacturing sector may be cooling. Industrial production still is up 5.6 percent from June of last year and economists expect the manufacturing sector to remain strong this year.

Industrial Production

Economists expected the industrial production index to rise 0.1 percent, the median of 69 forecasts in a Bloomberg News survey. Work at factories, which accounts for almost 90 percent of industrial production, fell 0.1 percent last month, after rising 0.6 percent in May. Electric and gas utility production fell 2.3 percent last month after rising 3.7 percent in May, according to the Fed report. Mine production rose 0.1 percent after being unchanged in May.

Vehicle production fell to 11.38 million units at an annual rate in June, according to the Fed's statistics, from 11.83 million in May. Manufacturing excluding vehicles rose 0.4 percent last month after a 1 percent rise.

Business equipment production, including transportation and information processing equipment, rose 0.4 percent in June after increasing 1.5 percent the month before. Production of technology equipment such as computers, communications gear and semiconductors rose 1.5 percent after a gain of 2.8.

``Business spending is still moving along, while consumer spending is slowing,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

Producer Prices

Economists forecast a 0.2 percent rise in the June producer price index, based on the median of 70 estimates in a Bloomberg News survey. The core rate of producer price inflation, which excludes food and energy, rose 0.2 percent after rising 0.3 percent. The core rate was seen rising 0.2 percent.

Crude oil for delivery on the New York Mercantile Exchange has increased to more than $40 a barrel this month after falling to a low in June of $35.66 a barrel. Metals prices have increased 9.7 percent so far this month, according to the Economic Cycle Research Institute.

In June, prices of raw materials increased 1.6 percent, the smallest rise since March, after a 2.8 percent gain, the Labor Department's data show. Prices of partially finished goods rose 0.5 percent, the smallest increase this year.

So far this year, producer prices are rising at a 5 percent annual rate compared with a 4.9 percent increase at the same time last year. Core prices are increasing at a 2.5 percent annual pace, compared with a 0.8 percent rate in the first six months of 2003.

Intermediate goods prices rose 0.5 percent in June after rising 1.1 percent the month before. Excluding food and energy, intermediate prices rose 0.5 percent after rising 0.9 percent. Compared with a year ago, core intermediate goods costs rose 5.8 percent, the biggest rise since September 1995.

Core crude goods prices fell 0.5 percent after falling 3.8 percent in May. Over the last 12 months, the costs of crude goods have risen 18.9 percent.

Fed policy makers policy makers raised their overnight bank lending rate a quarter point to 1.25 percent on June 30 to keep inflation from accelerating and said they could be `measured' in their approach to policy.

The effect of higher steel prices has been ``significant,'' said Robert Bohn chief executive of Oshkosh Truck Corp. The Oshkosh, Wisconsin-based company makes cement mixers and heavy- duty vehicles for the defense, fire and rescue industries.

``We have gone through with price increases in the last quarter to compensate us for that increase in steel,'' Bohn said in an interview Tuesday. ``And I think that pricing is going to be here for the next several months over the next year as that starts to stabilize and level off.''

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