US industrial production shrank last month for the first time this year, according to a report issued yesterday that highlighted the economy's vulnerability to the lingering threat of war.
However, Mr Paul O'Neill, US treasury secretary, sounded a confident note on the economy, saying it was "large enough and well enough" to weather a war. He also berated the media for what he called under-emphasising the positive.
The country's economic weakness is one of the key issues in November's Congressional elections, where control of both the Senate and House of Representatives is at stake.
Yesterday the Federal Reserve said industrial production fell in August for the first time since December, ending seven months of gains. The seasonally adjusted 0.3 per cent drop was mostly caused by declines in vehicle and utility output, but all major categories shrank except for mining and construction materials.
The report's diffusion index, which measures the balance between industries with rising and falling output, registered its second-worst reading this year.
Mr Michael Burt, an analyst with Economy.com, called the report "a significant signal that economic growth has completely stalled".
That was apparent from other recent reports, most notably figures showing the first drop in private-sector payrolls since April and a rebound in demand for unemployment benefits. But the Fed's figures surprised investors, ending an early morning rally spurred by the prospect of a peaceful resolution to US-Iraq tensions. The big question left unresolved by the latest report is the economy's direction.
On the whole, the economy has appeared aimless for months, adding fuel to a debate over whether it will falter, resume its recovery or slide into a protracted multi-year recession following the investment binge of the late 1990s.
Reports earlier this week suggested that businesses began an intentional build-up of inventories through the summer in anticipation of better times and raised the prospect of an eventual pick-up of growth in production, hiring and investment.
But the further weakening in stock prices over the past few weeks, signs of renewed apprehension among executives and more weakness in business investment and confidence have thrown this into doubt. Most economists continue to forecast a resumption of solid growth, but the uncertainty facing policymakers has been compounded by the anti-terrorism campaign and the prospect of war with Iraq. Some economists fear the economy's weakness makes it more vulnerable to shocks. - (Financial Times Service)
