FED SEEN CONTENT WITH U.S. FEBRUARY ECONOMY

  U.S. February reports reflecting slim
  gains in industrial output and moderating inflation pressures
  reinforced expectations that the Federal Reserve will continue
  to follow a stable course of monetary policy, economists said.
      "If you're the Fed, there's no reason to do anything," said
  Steve Slifer of Lehman Government Securities Inc.
      "There are hints that GNP is picking up. On the inflation
  front, all is well," he said. "Money supply is well under
  control. It's an absolutely ideal situation."
      February U.S. industrial production rose 0.5 pct, slightly
  less than the 0.7 pct gain the financial markets had expected.
  This compared with a slim 0.1 pct rise in January's production
  number, previously reported as a 0.4 pct increase.
      The February U.S. producer price index gained only 0.1 pct,
  less than a 0.3-0.4 pct expected rise. This followed a 0.6 pct
  rise in the PPI in January.
      "The Fed is going to look at this positively," said Allan
  Leslie of Discount Corporation. "Certainly inflation is not as
  bad as what Volcker (Fed Chairman) has said lately. Industrial
  production growth is along the lines of what the Fed wants."
      The energy products component of PPI rose 4.0 pct in
  February, after a 9.8 pct increase in January.
      "This shows that the impact of energy prices on inflation
  is behind us in terms of the move from 15 dlrs to 18 dlrs per
  barrel," said Maria Ramirez of Drexel Burnham Lambert Inc. "The
  trend is still 3.5 pct in the first half of the year."
      In 1986, declining energy prices contributed to a 2.5 pct
  decline in the PPI.
      Economists said that a rise in energy prices was expected,
  but a sharp drop in auto prices was not. Passenger car prices
  fell 3.4 pct and light truck prices dropped 1.3 pct.
      Yesterday, Federal Reserve Chairman Paul Volcker said that
  a possibility of renewed inflation remains a concern in both
  the financial markets and the Federal Reserve.
      "The Fed may be lowering its own inflation expectations
  today," said Robert Brusca of Nikko Securities International.
      While low inflation permits the Fed to maintain an easier
  monetary policy, Brusca said if import prices do not rise this
  could necessitate a weaker dollar.
      "The outlook for the dollar is still up in the air," he
  said. "We need inflation for U.S. producers to compete with
  foreign producers."
      Brusca said prices of electronic equipment dropped 0.8 pct
  in February's PPI. With many electronic goods produced
  overseas, this may show that foreign producers are not raising
  prices which bodes ill for U.S. competitiveness, he said.
      If further dollar declines are needed, this could diminish
  overseas investment in U.S. debt, Brusca added, which might
  necessitate higher interest rates and lower bond prices.
      By contrast, Slifer said imported goods prices rose 11.8
  pct from first quarter 1985 to first quarter 1986 reflecting to
  a large degree a 22 pct drop in the trade-weighted real value
  of the dollar from February 1985 to February 1987.
      Slifer said import prices may rise further as
  manufacturers' contracts put in place before the dollar dropped
  to current levels expire, and new contracts are made that
  reflect a weaker dollar.
      David Wyss of Data Resources Inc noted that imported
  manufactured goods prices rose 8.5 pct at an annual rate in the
  second half of 1986, which has contributed to rising U.S.
  industrial output.
      "It's the other side of the lower dollar," Wyss said.
  "Producers are beginning to find themselves more competitive
  and they are increasing output."
      Wyss said that the latest data point to an average
  industrial production gain of 0.3-0.4 pct in the first quarter.
  "It's an encouraging sign that the manufacturing sector is
  beginning to revive."
      But Stephen Roach of Morgan Stanley and Co Inc was not 
  convinced that the February reports portend economic gains. He
  said much of the strength came from factors that do not point
  to a sustained rise in industrial output.
      Roach pointed out that stikers returning to work in farm
  equipment industries helped account for a one pct rise in
  February business equipment production.
      Utilities output rose 0.7 pct in February after gaining 1.2
  pct in January, but Roach said it shows mostly that more energy
  was produced, not that manufacturing activity gained.
      Finally, he pointed out that auto production accounted for
  half of the industrial production gain as production of auto
  assemblies rose to 8.3 million units at an annual rate from 7.5
  million units.
      "In the first quarter, it looks like automakers are
  producing at an 8.5 mln unit annual rate, but selling at
  roughly a seven mln unit rate," Roach said. "The disparity
  between output and sales is showing up in inventories."
      Economists pointed to sharp rise in January U.S. business
  inventories as a sign that production may be outstripping
  demand in the first quarter of 1987.
      January business inventories rose 0.9 pct, the largest gain
  since July 1979 when inventories rose 1.7 pct, the Commerce
  Department said. Business sales dropped 4.5 pct in January, the
  largest monthly sales drop on record.
      Nonetheless, economists do not expect the Fed to react to
  month-to-month changes. "The Fed has been standing pat for the
  last seven months," Ramirez said. "They will continue to stand
  pat for at least the next couple of months."
  

