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Economy Remains Relatively Healthy Despite Credit Worries

Falling gasoline costs held U.S. consumer prices nearly in check in July and industrial output rose, according to data that suggested the economy was sound despite credit fears in financial markets.

Other reports Wednesday showed a slight dip in New York state manufacturing activity this month and a decline in the amount of capital flowing into the United States in June.

Analysts said the latest data, combined with reports earlier this week showing solid retail sales and a shrinking trade deficit, point to an economy that is doing pretty well.

"Things don't look that bad. There is no evidence yet in the data that the economy is on the cusp of losing steam," said Michael Darda, chief economist at MKM Partners in Greenwich,
Connecticut.

Still, a gauge of home builder sentiment from the National Association of Home builders hit its lowest since January 1991, suggesting a housing slump had a ways to run.

"Builders realize that issues related to mortgage credit cost and availability have become more acute, filtering some prospective buyers out of the market and prompting others to delay their decision to purchase a new home," said NAHB President Brian Catalde, a home builder from El Segundo, California.

Close to Expectations

The bulk of Wednesday's data was close to expectations on Wall Street and financial markets focused more on the fear credit would evaporate as problems in the subprime mortgage
market widen than the economy's health.

Throughout the day, stocks teetered between gains and losses, while prices for U.S. government bonds were mixed.

Central banks around the globe have pumped money in the financial system over the past week in an effort to keep credit flowing.

Financial markets now expect the Federal Reserve to lower interest rates at its next meeting on Sept. 18, if not before, to buffer the economy as credit becomes more scare.

Many economists, however, do not expect the central bank to act that quickly.

"To me, the risk remains the economy not inflation, but I doubt the Fed will change course before the Sept. 18th meeting without an even more major deterioration in financial conditions," said Joel Naroff, president and chief economist of Naroff Economic Advisors in Holland, Pennsylvania.

The Consumer Price Index, a key inflation gauge, rose just 0.1 percent last month as gasoline prices fell 1.7 percent, the Labor Department said. Economists polled by Reuters had
expected a rise of 0.2 percent.

So-called core inflation, which excludes volatile food and energy prices, rose 0.2 percent, matching forecasts. Year-over-year, the core CPI held steady at 2.2 percent for a
third straight month.

Focus on Inflation

The Fed said last week that inflation remained its predominant concern, although it acknowledged that a wobbly housing market had led to tightening credit terms for some
households and businesses.

"The July CPI readings don't make it any harder or easier for the Fed to cut interest rates," said Richard Huber, economist at A.G. Edwards and Sons in St. Louis. "The trade deficit data we got yesterday will drive GDP numbers for the second quarter higher, which will allow the Fed to say that it's still focused on inflation."

Industrial output rose 0.3 percent in July as automotive-related production surged 2.6 percent, offsetting a big decline in utility output, a Federal Reserve report showed.

Manufacturing output rose 0.6 percent.

"Low inventory levels, strong export demand, and ongoing moderate economic growth at home have allowed the manufacturing sector to shake off the depressing effects of the housing
downturn," said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI.

Separately, the U.S. Treasury said net overall capital inflows into the United States dropped to $58.8 billion in June from May's revised inflow of $107.3 billion, hurt by a plunge in net purchases of U.S. securities by private investors.

June's net overall capital inflow barely covered the U.S. trade deficit for the month of $58.1 billion.

In another report, the New York Federal Reserve Bank said manufacturing in New York State factories slowed in August. The New York Fed's "Empire State" general business conditions index fell modestly to 25.06 from 26.46 in July.

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