Manufacturing Contracts, Wholesale Prices Decline

U.S. Economy: Manufacturing Contracts, Wholesale Prices Decline

By Courtney Schlisserman and Bob Willis

July 15 (Bloomberg) -- Manufacturing in the U.S. contracted in June by the most in a year and wholesale prices declined more than anticipated, underscoring the Federal Reserve’s reduced forecasts for economic growth and inflation.

Factory output fell 0.4 percent in June, a Fed report showed today. Producer prices slid 0.5 percent after a 0.3 percent decline the month before, the Labor Department said. Other reports showed factories pulled back in the New York and Philadelphia regions in July.

Stocks dropped and Treasuries rose on concern slowing growth in China and cooling U.S. consumer spending will offset the demand for business equipment that has been spurring American industry. Unemployment forecast by the Fed to stay above 9.2 percent this year will limit purchasing power and prices, giving the central bank reason to keep interest rates near zero into 2011.

“Production is now dependent on the rate of growth in underlying demand, in the business equipment area it’s very good but in the consumer area it’s very sluggish,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “Cost pressures are receding.”

The Standard & Poor’s 500 Index fell 0.9 percent to 1,085.05 at 12 p.m. in New York. The yield on the 10-year Treasury note dropped 7 basis points to 2.97 percent.

A pickup in business spending to update equipment, which has spurred sales and earnings at companies such as Intel Corp., will propel manufacturing in coming months as consumer demand cools.

“Capacity still needs to be increased in order to meet demand,” Richard Hill, chief executive officer of Novellus Systems Inc., said in an interview July 13. “There’s a major overhaul of PCs throughout the corporate world.”

Confidence in Rebound

Novellus, which makes semiconductor equipment, said July 12 bookings rose 20 percent in the second quarter compared with a year earlier and shipments increased 17 percent. “Challenges” in North America “are not as bad as people might report” and consumers are “reasonably confident that the economy is going to rebound,” Hill said in the interview.

Production of business equipment increased 0.9 percent after a 1.4 percent rise in May. Output of computers and semiconductors led the gain last month.

Output of motor vehicles and parts dropped 1.9 percent in June after a 5.6 percent jump a month earlier. Excluding autos and parts, manufacturing was down 0.3 percent. Consumer goods production fell 0.6 percent.

Intel, the world’s biggest chipmaker, said on July 13 that sales will be $11.6 billion this quarter, plus or minus $400 million. Analysts estimated $10.9 billion on average, according to a Bloomberg survey.

Philadelphia, New York

The manufacturing slowdown continued in the northeastern U.S. this month, according to regional indexes compiled by the Fed banks of New York and Philadelphia.

The Philadelphia Fed’s index, which covers eastern Pennsylvania, southern New Jersey and Delaware, fell to 5.1 this month, the lowest level since August 2009, from 8 in June. The New York Fed’s manufacturing gauge, which includes northern New Jersey and southern Connecticut, dropped to 5.1 from 19.6. In both cases, readings above zero indicate expansion.

Industrial production, which adds mining and utilities to manufacturing, unexpectedly rose 0.1 percent in June as higher temperatures boosted demand for electricity, the Fed’s report showed. Last month was the eighth-warmest June in 116 years, according to the National Climatic Data Center.

Utility output increased 2.7 percent after a 5.6 percent jump in May. Mining production, which includes oil drilling, rose 0.4 percent.

Fed Forecast

Fed officials trimmed their forecasts for economic growth and inflation, according to minutes of their June meeting released yesterday, while adding that they saw no need to boost stimulus to the economy.

“The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside,” the minutes said. “The changes to the outlook were viewed as relatively modest and as not warranting policy accommodation beyond that already in place.”

The credit crisis in Europe is adding to the risks to the recovery, along with a slowdown in China, the world’s fastest- growing major economy.

China Growth

China’s economy expanded 10.3 percent in the second quarter from a year earlier, less than forecast by economists and down from growth of 11.9 percent in the first three months of the year, the country’s statistics bureau said today. Industrial production rose 13.7 percent in June, also less than anticipated by economists.

U.S. central bankers yesterday lowered their central tendency forecast for growth this year to a range of 3 percent to 3.5 percent versus 3.2 percent to 3.7 percent in April, the minutes showed.

Policy makers at their June 22-23 meeting trimmed their outlook for inflation this year to a range of 1.0 percent to 1.1 percent, down from 1.2 percent to 1.5 percent in April. A few policy makers expressed concern about some risk of deflation, the minutes said.

Compared with a year earlier, companies paid 2.8 percent more for goods in June after rising 5.3 percent in the 12 month ended in May, today’s Labor Department report showed. Excluding food and energy, wholesale prices rose 1.1 percent in the 12 months ended in June after a 1.3 percent year-over-year increase a month earlier.

Another report today showed initial claims for jobless benefits declined last week, reflecting a smaller number of factory closings for this time of year.