U.S. Economy: Factories Lead Rebound as Housing Falls (Update1)
By Timothy R. Homan and Courtney Schlisserman
June 16 (Bloomberg) -- Production in the U.S. rose by the most since August and builders broke ground on fewer homes than projected, showing manufacturing is sustaining the recovery as the housing market retreats following the expiration of a government tax credit.
Output at factories, mines and utilities increased 1.2 percent last month after a 0.7 percent gain in April, a Federal Reserve report in Washington showed today. Housing starts fell 10 percent, the biggest decline since March 2009, according to figures from the Commerce Department.
Companies are rebuilding inventories and investing in new equipment as rising overseas demand drives profits at manufacturers including Deere & Co. Another report today showed producer prices fell last month, giving the Fed scope to keep interest rates near zero to sustain the recovery as less government spending and the European debt crisis hurt growth.
“We continue to have an economic expansion that’s moderate overall and uneven,” said Richard DeKaser, chief economist at Woodley Park Research in Washington, who accurately forecast the gain in industrial production. “Clearly, the factory sector is helping to offset the weakness” in the housing market.
Most stocks dropped on a disappointing earnings forecast by FedEx Corp. and on concern over the outlook for housing. The Standard & Poor’s 500 Index fell 0.1 percent to close at 1,114.61. Treasury securities rose, sending the yield in the benchmark 10-year note down to 3.26 percent at 4.54 p.m. in New York from 3.30 percent late yesterday.
Exceeds Expectations
Economists forecast industrial production would increase 0.9 percent in May, according to the median of 82 projections in a Bloomberg News survey. Estimates ranged from gains of 0.5 percent to 1.6 percent.
Housing starts fell to a 593,000 annual rate from a revised 659,000 pace in April that was lower than previously estimated. Building permits, a sign of future construction, unexpectedly declined to a one-year low, the report from the Commerce Department showed. Single-family home starts suffered the biggest drop since 1991.
The plunge followed the expiration of a government incentive worth as much as $8,000, which required contracts be signed by April 30 and closed by the end of this month. Builders are rushing to complete projects before the June closing deadline and are less focused on starting new projects.
“Builders are obviously feeling very cautious, justifiably cautious,” said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh. Home construction in the third quarter is “going to be weak and will be a drag on” the economy, Dye said.
‘Weak’ Homebuilding
Prices paid to factories, farmers and other producers fell 0.3 percent in May, the third decline in four months, figures from the Labor Department also showed today. Excluding food and fuel, so-called core prices climbed 0.2 percent for a second month.
The European debt crisis has prompted economists to trim inflation forecasts on increased prospects for weaker global growth and a strengthening dollar. With about 25 percent of U.S. plant space idle and unemployment hovering around 10 percent, companies have little ability to raise prices.
“Slack in the labor force and excess capacity continue to keep inflationary pressure in check,” Lindsey Piegza, an economist at FTN Financial in New York, said in a note to clients. “Deflationary pressures continue to temper expectations of a near-term change in interest-rate policy.”
Idle Resources
The Fed’s production report showed capacity utilization, which measures the amount of a plant that is in use, rose to 74.7 percent last month from 73.7 percent in April. The rate is still lower than the 80 percent average over the last two decades. Excess capacity reduces the risk of bottlenecks that can force prices up, indicating inflation will remain low.
The gain in output was paced by increases among auto, computer, electronics and machinery makers.
Deere, the world’s largest farm-equipment maker, said on its website last week that sales of utility tractors rose in the “double digits” in May, compared with a 6 percent increase for the industry overall.
Growing global demand for agricultural commodities, housing and infrastructure is driving sales, Samuel Allen, chief executive officer of the Moline, Illinois-based company, said last month in a statement. Deere last month raised earnings and sales forecasts for a second time this year after second-quarter profit topped analysts’ estimates.
Rising Exports
Manufacturing, which makes up about 11 percent of the economy, is benefiting from gains in business spending and global economic growth. U.S. exports have risen 10 of the last 12 months, helped by surging growth in emerging Asian and Latin American countries, according to figures from the Commerce Department.
“People have an undue sense of pessimism relative to what is actually happening out there,” FedEx Chief Executive Officer Frederick Smith said, referring to growth in the shipment of high-value goods. Shipping demand is rising as a growing middle class in India, Brazil and China increasingly uses the Internet to order goods, he said on a conference call.
“We expect stronger demand for our services and continued growth in revenue and earnings as global economic conditions continue to improve in fiscal 2011,” Smith said.
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