U.S. Economy: Production Increases, Housing Stagnates

Production at U.S. factories climbed in January for a fifth consecutive month, while builders began work on fewer single-family houses, showing the expansion remains driven by manufacturing as housing stagnates.

Manufacturing output increased 0.3 percent after a revised 0.9 percent jump in December that was more than twice as large as previously reported, figures from the Federal Reserve showed today. Total production, including mining and utilities, unexpectedly dropped. Single-family home starts decreased 1 percent to a 413,000 annual pace, the fewest since May 2009, according to the Commerce Department.

Stocks climbed as business investment in new equipment and improving global sales lead to better-than-expected earnings at manufacturers like Dell Inc. By contrast, builders are contending with a surfeit of unsold properties as unemployment hovers around 9 percent and foreclosures mount.

“Manufacturing has been an important contributor to growth and it’ll get stronger,” said Jim O’Sullivan, global chief economist at MF Global Inc. in New York. “Given the still-huge glut of housing inventories, new-home building is unlikely to contribute to the economy in any meaningful way this year.”

The Standard & Poor’s 500 Index rose 0.6 percent to 1,336.32 at the 4 p.m. in New York. The S&P Supercomposite Machinery Index, which includes manufacturers like Parker Hannifin Corp. and Caterpillar Inc., also advanced 0.6 percent.

Unexpected Drop

Economists had forecast a 0.5 percent gain in overall production, according to the median estimate of 80 economists surveyed by Bloomberg News. Projections ranged from a drop of 0.5 percent to an increase of 0.9 percent.

Another report today showed wholesale costs increased for a seventh consecutive month in January, led by higher prices for fuel. The producer price index rose 0.8 percent, according to data from the Labor Department, matching the median forecast of economists surveyed. The so-called core measure, which excludes volatile food and energy costs, rose 0.5 percent, the biggest rise since October 2008.

The Fed’s report also showed total production was unexpectedly restrained by a decline in utilities as milder temperatures curbed demand for heating. Output fell 0.1 percent after a 1.2 percent increase in December.

Mining production, which includes oil drilling, decreased 0.7 percent last month. Utility output fell 1.6 percent after a 4.1 percent increase the prior month.

Automakers are benefiting from rising sales. Output of motor vehicles and parts jumped 3.2 percent in January after rising 0.2 percent a month earlier.

Business Equipment

Production of business equipment rose 0.9 percent after a 1 percent gain. Output of computers and semiconductors rose 0.9 percent after increasing 1.5 percent.

Dell, the world’s third-largest personal-computer maker, yesterday reported quarterly profit that exceeded analysts’ estimates after companies replaced older PCs with new models running Microsoft Corp.’s Windows 7 software -- a boon that will last a number of quarters, said Chief Financial Officer Brian Gladden.

Parker Hannifin, a Cleveland-based manufacturer viewed as a barometer of global industry, is among businesses seeing an improvement in orders as the economy recovers. The maker of components used in construction equipment, aircraft, refrigeration, and hybrid delivery trucks also projected growth in the Europe, Asia and Latin America regions.

‘Bullish’ on Orders

“We’re pretty bullish as far as what the future order pattern is,” Thomas Williams, executive vice president and operating officer, said on a conference call on Feb. 9. “Our backlog is building,” he said, and “we’ve got ramp-up in volume.”

The Commerce Department report showed total housing starts, including single- and multifamily units, climbed 15 percent to a 596,000 annual rate, exceeding the median forecast of economists surveyed. Work started on 78 percent more dwellings with two or more homes, overshadowing the drop in single-family construction that makes up about 70 percent of the market.

“Housing activity is going to remain at depressed levels this year,” said Ellen Zentner, a senior macroeconomist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York who forecast a rate of 555,000. “We’ve got home prices that have taken another leg down and will probably stay down through midyear.”

Work on multifamily homes, such as townhouses and apartments, jumped to an 183,000 annual pace, the most since February 2009. The surge may reflect the influence of building code changes this year that caused companies to rush to file construction applications in December.

Fewer Permits

Building permits, an indicator for future construction, dropped 10 percent to a 562,000 annual pace last month after climbing 15 percent in December. Applications for multifamily units dropped 24 percent in January after advancing 46 percent the prior month, a sign starts in this volatile category may fall this month or next.

“Building permits turn into housing starts within one month,” said Zentner. “A surge in housing starts in January is simply a factor of those building permits coming through.”

Hovnanian Enterprises Inc. on Dec. 22 reported a fourth- quarter loss bigger than analysts expected as revenue fell 19 percent. The company has cut about 75 percent of its workforce in the past four years, Ara Hovnanian, chief executive officer of New Jersey’s largest homebuilder, said this week on Bloomberg Television’s “Surveillance Midday” with Tom Keene.

“The issue is unemployment, fear and lack of confidence, and that’s what’s got to turn right now,” Hovnanian said during the interview.

To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net; Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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