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Industrial Production Jumps

U.S. industrial production jumped 0.7%, which combined with the net upward revision to previous months, left capacity utilization at 75.4% from 74.9%. The increase in production marks the largest monthly gain since May, 2000. And it leaves production on the quarter rising at a 2.5% seasonally adjusted annual rate -- the first quarterly rise since the third quarter of 2000 and a noticeable shift from the 4.7%-6.7% annualized declines seen in every quarter of 2001.

Moreover, the data further help to reconcile production figures with the impressive strength seen in other parts of the economy, as resilient strength in consumer spending and depleted inventory levels forced factories to jump-start production.

As for the major aggregates, manufacturing jumped 0.8% on broad-based strength, with several industries posting gains in excess of 1%. Utilities added to the strength with a gain of 1.6%, while mining was one of the few areas of weakness in the report with a decline of 1.6%. Overall, the data are in agreement with other related reports, and suggest that the worst news in the factory sector is clearly behind us.

CPI Tame

The overall CPI rose 0.3% and the core index rose 0.1% in March. The gains were more subdued than expected, which support the view that inflation should not be an immediate concern for the Federal Reserve.

As expected, and similar to what was seen in both import prices and the PPI, energy accounted for much of the strength on the month with a gain 3.8% -- led by an 8% surge in gasoline prices. Food prices rose 0.2%, led by another big gain in the price of fruits & vegetables.

As for the core, the aggregate was depressed by a 3.5% drop in tobacco prices, a 0.6% decline in other goods & services, a 0.5% fall in education & communication, and a 0.4% decrease in vehicles. This left the core on a year-over-year basis rising at 2.4%, which marks the lowest rate since May, 2000.

Overall, this is a benign report -- especially given the upside risk on the month. The report supports the view of S&P MMS that still-depressed commodity prices, lack of pricing power brought on by over-capacity, strength in productivity, the rich level of the dollar, and the recent deceleration in wage costs all are helping to keep inflation trends in-check.

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