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Friday, May 14, 1999 Published at 14:27 GMT 15:27 UK

Business: The Economy

US industry overheating

US factories are producing more goods

Industrial production in the US has been growing faster than analysts expected prompting fears that the booming economy could overheat.

US industrial production grew by 0.6% in April, its fastest rate for some months.

Until recently the industrial sector had been one part of the economy tempering rapid growth in other sectors.

But even that analysis is now looking jaded. It means fears of inflation kicking in may not be so far fetched after all, illustrated by the latest Cosumer Price Index figures.

Overall the US economy has been growing at a relatively high 4%.

Revised upwards

The industrial production figure for the previous month was also revised sharply upwards to 0.5%, from an earlier figure of only 0.1%.

Capacity utilisation - a measure of how many of the nation's factories were fully in use - rose to 80.6%, another figure that will concern the markets.

Manufacturing had been the one weak spot in the booming US economy, hit by the Asian crisis and a decline in exports.

"We could be looking at a stronger world economy joining an already robust US pace of business activity and that can only point towards increased inflation risks and higher interest rates in the months ahead," said John Lonski, of Moody's Investment Services.

Pressure on interest rates

Interest rates on US government bonds rose to near 6%, suggesting that traders believe inflation will continue to rise, forcing the US central bank to take action.

The Fed holds its next rate-setting meeting next Tuesday. Few expect it to raise interest rates at that meeting, but some analysts are worried that the Fed could tell the markets it is leaning towards such an increase, a so-called asymmetric bias.

"Manufacturing has bottomed and is beginning its recovery. We had said they (the Federal Reserve) are going to go to an asymmetric bias. The data today confirms this feeling that the Fed is going toward an asymmetric bias," commented Maureen Maitland, of Donaldson Lufkin & Jenrette.

Manufacturing output rose across the board, according to the Federal Reserve, which also publishes this set of figures. The strongest growth was in domestic durable goods, including the cars and domestic appliances.

Industrial production includes the output of utilities like gas and electricity, construction and mining as well as manufacturing.

Stock markets in Europe and the United States fell sharply, as traders worried about a possible rise in interest rates.

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