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."