Slowdown in US is longest since 1930s depression
By Peronet Despeignes in Washington
Published: November 16 2001 21:51 | Last Updated: November 17 2001 00:28

Retail down image

US industry has been in recession for longer than at any time since the Great Depression of the 1930s, according to figures for last month published on Friday.

Other official figures showed that on one measure retail prices fell at the fastest pace in 15 years, thanks to a drop in energy prices.

The reports underscored the weakness of the US and global economies. It provided more evidence for the handful of US economists, who believe there is a threat of deflation - a cycle of falling prices, profits, production and employment such as afflicted America in the 1930s and Japan for much of the 1990s.

The Federal Reserve said output from US factories, mines and utilities fell a seasonally adjusted 1.1 per cent in October following a 1 per cent decline in September. While the fall is nowhere near as deep as the 50 per cent drop in output witnessed from 1929 to 1932, industrial output has shrunk for 13 consecutive months - unmatched since the 1930s - for a total fall of 6.5 per cent.

Industry operated at a rate 25.2 per cent below its potential in October, the highest level of capacity under-utilisation since 1983. The decline was the most widespread since 1980.

The Labor Department said its consumer price index fell a seasonally adjusted 0.3 per cent - the biggest decline since March 1986 - led by a 10.7 per cent drop in the price of petrol.

The erosion in output partly reflected temporary disruptions from the September 11 attacks.

On prices, the decline in the CPI was only slightly greater than the 0.28 per cent drop in July. Excluding food and energy prices, which are volatile, the CPI rose 0.2 per cent for the fourth consecutive month.

Widespread expectation of deflation is a necessary fuel for sustained deflation, and neither surveys nor movements in financial markets show this to exist, though all the relevant financial market measures have dropped in the past few months.

Treasury bond prices on Friday fell and yields rose, in part because reports of successes in the anti-terrorism war have reversed the flow of funds into safer havens. Fed funds futures prices also dropped, showing that market expectations of a monetary tightening by the US Federal Reserve next year had increased.

Richard Yamarone, an economist with Argus Research in New York, said the CPI report showed prices for rent, education, medical care and other services continued to rise last month. "We're mostly a service economy, and service prices are still rising significantly."

However, the rate of increase continued to slow in October. Consumer prices overall rose 2.1 per cent in the year to October - the slowest 12-month pace in more than two years. Services prices rose at the slowest pace in more than a year.

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