Industrial Output Rises 0.7% in August : Economy: Capacity-use rate hits 84.7%, highest in five years. Some experts say Fed rate hike is now assured.

WASHINGTON — Industrial output surged in August due to a big jump in the production of new cars, the Federal Reserve Board said Friday, and inflation fears were reignited on the news that factories were pushed to their highest operating levels in more than five years.

Industrial output rose 0.7% overall in August--the strongest monthly rise since March, largely due to the auto industry roaring back with sharply higher production. Manufacturing of other goods--from computers, metals, machinery and petroleum products to lumber and paper--also picked up from July.

“The basic message is that manufacturing is still in a full-blown cyclical advance,” said economist Robert Dederick of Northern Trust Co. in Chicago. “Right now, the auto industry has shifted into overdrive, and it’s pulling the whole economy along with it.”

The most startling part of the August report is the surge in the capacity-use rate to 84.7%--the highest since April, 1989, when factories also ran at 84.7% of capacity, a level clearly regarded as likely to fan inflation. In addition, production gains for May, June and July were all revised upward, to 0.5%, 0.6% and 0.3%, respectively, from previously reported rises of 0.3%, 0.5% and 0.2%.

The Fed’s policy-setting Federal Open Market Committee meets Sept. 27 and again Nov. 15 to consider whether more interest rate increases are needed to keep inflation in check.

“The numbers were shockingly strong,” said David Jones of Aubrey G. Lanston & Co., a New York government securities dealer.

He said they practically assure that the Fed will raise short-term interest rates a sixth time this year, possibly before its November meeting.

Industrial Production

Seasonally adjusted index:

1987=100

Aug. 1994: 118.5

Source: Federal Reserve Board