THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Wednesday, September 28, 1994 TAG: 9409280403
SECTION: BUSINESS PAGE: D6 EDITION: FINAL
SOURCE: ASSOCIATED PRESS
DATELINE: NEW YORK LENGTH: Medium: 57 lines
A bad case of inflation jitters on Wall Street has been aggravated lately by talk that the U.S. economy soon may be straining against the limits of its capacity to produce.
The worries arise from Federal Reserve Board figures showing ``capacity utilization'' as its highest level in more than five years.
The Fed reported that the nation's factories, power plants and mines operated at 84.7 percent of their capacity in August, up from 84.3 percent in July and 81.4 percent in August 1993.
During the recession and sluggish initial recovery of the early '90s, the rate dropped well below 80 percent.
By an old rule of thumb in street-corner economics, any time capacity utilization gets to 85 percent or so, upward pressure on prices of goods and services is likely to increase.
At that stage, demand presumably starts to outpace the ability of business to meet it fast enough. Then, the cost of increasing production swells because of the outsized expense of adding new workers or paying overtime, as well as of buying new plants and equipment.
But many economists dispute this concept as oversimplified, or just plain wrong based on the historical record.
``The idea is as old a wives' tale as exists in economics,'' says Robert Brusca, chief economist at Nikko Securities Co. International Inc. ``You cannot demonstrate this ethereal line in the sand with charts or statistics.''
While the logic of the capacity-utilization theory may be understandable, analysts say, the record doesn't support its conclusions.
In the 1950s, they note, capacity utilization frequently climbed above 85 percent without touching off any significant inflationary pressures. The 1970s, in comparison, witnessed lower capacity-utilization rates on balance, and yet much worse inflation.
Many observers argue that capacity limits by themselves can't ``cause'' inflation, at least without an accompanying growth in the money supply. But even if high utilization rates are inflationary, analysts argue, a good case can be made that the current data make the situation look worse than it is.
``There's more running room in the U.S. economy than is widely perceived,'' declares Stephen Roach at Morgan Stanley & Co. ``Restructuring and new technologies are providing more efficiencies for a given unit of production capacity than in the past.
``The bottom line is that the prognosis for inflation is still very constructive. Given our cost-efficient, productivity-led growth scenario, we don't believe that the U.S. economy is in danger of running out of room during the next few years.''
KEYWORDS: ECONOMY by CNB