South-Western College Publishing - Economics  
Signs of Moderation
Subject Economic Policy
Topic Employment, Unemployment, and Inflation
Key Words Economic Growth, Inflation, Unemployment
News Story

The current economic expansion, now in its 108th month, is closely being monitored. Indications of too high a growth rate produce calls for increases in interest rates. Evidence of a slow-down reduces the need for increases in interest rates to slow demand. Statistics on industrial production and capacity-utilization provide monthly indications of economic growth. The Federal Reserve reported that industrial production in February was slower than expected. Production by the nation's factories, mines and utilities increased by 0.3 percent compared to a forecasted gain of 0.5 percent for the month.

Capacity utilization is a measure of total output compared to estimated capacity. According to the Federal Reserve, businesses operated at 81.7 percent of capacity in February, the same as in January. A capacity utilization of 85 percent is considered to be an indication of production bottlenecks and inflationary pressures. As capacity utilization increases, so does the risk of higher inflation.

A separate report by the Commerce Department, showed that the inventory-to-sales ratio, a measure of how long it would take to fully deplete inventories at the current strength of retail sales, fell to a record low of 1.31 months in January. Increases in the inventory-to-sales ratio are indications of weakened consumer demand and when inventories reach levels that firms consider too high, layoffs and decreases in production usually follow. The decrease, as reported by the Commerce Department, shows that consumer demand is still robust.

 

(Updated April 1, 2000)

Questions
1. How often are statistics on the nation's Gross Domestic Product reported? Statistics on Industrial Production are reported monthly. Why might industrial production be a useful predictor of the course of GDP?
2. What is the business cycle? Why might changes in the inventory-to-sales ratio be an indicator of a turning point in the business cycle?
3. Capacity utilization rates have increased steadily since the beginning of 1999. Why are increases in capacity utilization associated with increased inflationary pressures?
4. The Federal Reserve is concerned about inflation. Is the data reported in this article consistent with higher or lower risk of inflation? Explain your answer.
Source Reuters, "Growth in Industrial Sector Was Less Robust in February," The New York Times, March 16, 2000.

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