U.S. Economy: Production Rises, Inflation Slows

Industrial production in the U.S. increased more than forecast in November and consumer prices slowed, indicating the recovery is gaining momentum without generating inflation.

Output at factories, mines and utilities rose 0.4 percent, the biggest gain since July, after a revised 0.2 percent drop in October, a Federal Reserve report showed today in Washington. The consumer-price index climbed 0.1 percent in November after a 0.2 percent gain the prior month, the Labor Department said.

Assembly lines are speeding up as business investment and exports grow and consumer spending accelerates, helping to buoy an expansion that Fed policy makers said yesterday isn’t strong enough to reduce a jobless rate hovering near 10 percent. Price increases that are below central bankers’ goal will boost the case to maintain the Fed’s purchases of $600 billion in securities through June to spur growth.

“The manufacturing sector continues to heal itself,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets in Boston. “The outlook for business spending on equipment and software remains very positive.” Fed Chairman Ben S. Bernanke “is unlikely to withdraw accommodation until he sees a clear upward turning point in core inflation and a downward turn in unemployment.”

Stocks fell, dragging the Standard & Poor’s 500 Index down from a two-year high after a six-day rally left the gauge at its most expensive level since June. Economists forecast a 0.3 percent gain in production, according to the median of 75 projections in a Bloomberg News survey.

Stocks Gain

The S&P 500 (SPX) declined 0.5 percent to 1,235.23 at the 4 p.m. close in New York. Treasury securities retreated, sending the yield on the benchmark 10-year note up to 3.53 percent from 3.48 late yesterday.

Factory production increased 0.3 percent for a second month, the Fed’s report showed, led by a 0.9 percent increase in business equipment, including computers, communications equipment and semiconductors.

Rising international demand and the need to replace aging equipment is a boon to manufacturers. Exports rose to a two-year high in October, Commerce Department figures showed Dec. 10. Business spending on equipment and software advanced at a 17 percent annual rate in the third quarter.

Broadcom Corp. (BRCM), the biggest maker of chips for television set-top boxes, yesterday increased its fourth-quarter revenue projection to about $1.9 billion, the top end of an earlier forecast range. Irvine, California-based Broadcom is making inroads in the mobile-phone market, supplying radio chips for handsets from South Korea’s Samsung Electronics Co. and Finland’s Nokia Oyj.

Extended Recovery

“We have seen now an extended period of time of recovery in the components business,” Paul Reilly, chief financial officer of Arrow Electronics Inc., said yesterday at a conference in New York. Melville, New York-based Arrow is a distributor of electronic components and computer products to industrial customers.

The need for truckers to replace aging vehicles has brought improvements at Wabash National Corp. The Lafayette, Indiana-based maker of semi-truck trailers has “nearly doubled” its workforce this year, adding over 1,200 associates, chief executive officer Richard Giromini said in a Bloomberg Television interview Dec. 13.

“The industry has improved dramatically, demand has increased and our customers are now feeling much more comfortable placing orders to replace their aged equipment going forward,” Giromini said.

Auto Production

Carmakers decreased output by 6 percent last month, the first drop since August, even as demand climbed, indicating production may rebound in coming months. Factory output excluding motor vehicles, rose 0.7 percent in November, the biggest gain since May.

Nationwide, capacity utilization, which measures the amount of a plant in use, increased to 75.2 percent last month, the highest level since October 2008. The gauge averaged 80 percent over the past 20 years, signaling there’s enough spare equipment to prevent bottlenecks that would lead prices higher.

“We’re very far from getting close to stretching industrial capacity,” said Michael Feroli, chief U.S. economist at JPMorgan Securities LLC in New York.

The median estimate of economists in a Bloomberg survey called for a 0.2 percent gain in the consumer-price index. The so-called core measure, which excludes more volatile food and energy costs, also rose 0.1 percent, matching the median forecast.

Price Cuts

Retailers that are cutting prices are drumming up demand, while those not discounting enough are struggling.

Best Buy Co. (BBY), the world’s largest consumer-electronics retailer, yesterday slashed its annual profit forecast amid increasing competition from Wal-Mart Stores Inc. and Target Corp. Best Buy lost TV sales in the third quarter to “the large discounters” that promoted the least-expensive models, Chief Executive Brian Dunn said on a conference call.

Confidence among U.S. homebuilders was unchanged in December from a month earlier, indicating residential construction will stay near depressed levels, a National Association of Home Builders/Wells Fargo’s index showed today.

Fed policy makers are concerned economic growth is not strong enough to reduce unemployment, which climbed to a seven-month high of 9.8 percent in November.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net.

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

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