U.S. Industrial Production Stalls on Auto Disruption; Housing Starts Drop

Industrial production in the U.S. unexpectedly stalled in April and housing starts dropped, posing hurdles to a rebound from the first quarter’s economic slowdown.

Output at factories, mines and utilities was unchanged after a 0.7 percent gain in March, figures from the Federal Reserve showed today, led by a drop in auto production after parts supplies were disrupted by the earthquake and tsunami in Japan. Work began on 523,000 houses at an annual pace, down 11 percent, as tornadoes and floods in the South shut down construction sites.

Production may reassert its place at the leading edge of the recovery as parts supplies resume, while overseas demand and business investment boost sales at companies like Caterpillar Inc. (CAT) At the same time, a housing recovery may take years to unfold as foreclosures and 9 percent unemployment hold back demand.

“The second quarter will be a little better than the first, though it’s not going to be off to the races,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “It’s a reasonably good outlook for manufacturing” and “housing is bouncing along the bottom.”

Treasury securities rose and stocks declined after the reports. The yield on the benchmark 10-year note, which moves inversely to prices, fell to 3.10 percent at 12:04 p.m. in New York from 3.15 percent late yesterday. The Standard & Poor’s 500 Index declined 0.5 percent to 1,322.57.

Economists had forecast a 0.4 percent gain in industrial production, according to the median estimate in a Bloomberg News survey. Housing starts were forecast to rise to a 569,000 pace.

Autos, Parts

Factory output, which makes up 75 percent of the total, fell 0.4 percent, and production of automobiles and parts plunged 8.9 percent, the Fed report showed. Excluding autos, manufacturing rose 0.2 percent.

“The weakness was primarily concentrated in autos due to the parts shortage, but that’s temporary and auto output will come snapping back,” said Brian Jones, an economist at Societe Generale in New York, who correctly forecast that industrial production would be unchanged.

Capacity utilization, which measures the amount of a plant that is in use, fell to 76.9 percent last month from 77 percent in March. The gauge compares with the average of 79.5 percent over the past 20 years.

Mining production, which includes oil drilling, increased 0.8 percent. Utility output climbed 1.7 percent.

Dollar’s Decline

Manufacturing, which accounts for about 12 percent of the economy, is likely to keep bolstering economic growth as an 18 percent drop in the dollar index from June 7, 2010 to April 29 made American-made goods more attractive abroad.

Exports jumped 4.6 percent in March, the biggest gain since 1994, to a record $172.7 billion. The gain reflected overseas demand for autos, chemicals and industrial machinery. Sales to customers in South and Central America reached a record, and purchases from clients in the European Union were the strongest since June 2008.

Caterpillar, the world’s largest construction equipment maker, last month said it expects global economic growth this year of about 4 percent, with developing countries expanding by 6.5 percent and the U.S. growing by 3.5 percent.

The Peoria, Illinois-based company raised its full-year earnings forecast and said the outlook would have been higher had it not been for the March 11 earthquake in Japan.

Japanese Suppliers

“Our facilities in Japan were not damaged by the earthquake and tsunami, but many of our suppliers in Japan were,” Chief Executive Officer Doug Oberhelman said on an April 29 conference call. “As a result, we are experiencing sporadic production disruptions at many of our facilities around the world.”

A survey by the Institute for Supply Management released today showed manufacturers have a more optimistic outlook for sales and spending in 2011 than they did at the end of last year.

Factory purchasing managers project sales will grow 7.5 percent this year, up from a 5.6 percent December forecast, according to the Tempe, Arizona-based group’s semiannual forecast. By contrast, service providers estimated revenue will rise 2.1 percent this year, less than the 3.4 percent forecast in December.

Today’s Commerce Department report showed housing starts dropped in two of four regions, led by a 23 percent decrease in the South, the largest area. They fell 4.8 percent in the Northeast and climbed 16 percent in the Midwest and 3.7 percent in the West.

Weather’s Influence

Weather may have played a role. Last month was the 10th wettest April since record-keeping began in 1895, with 875 preliminary reports of tornados, a record for any month, according to the National Climatic Data Center. Most wind damage occurred from the southern and central plains to the Atlantic coast.

Flooding on the Mississippi River may continue to constrain homebuilding in the region this month, Morgan Stanley economists David Greenlaw and Ted Wieseman wrote in a note to clients today. They forecast starts to show “little increase” this year.

The Commerce Department revised March’s total to a 585,000 pace, up from a previously estimated 549,000. Starts reached a record low 477,000 pace in April 2009.

Building permits, a gauge of future construction, fell 4 percent to a 551,000 annual pace in April.

CoreLogic Inc. in March estimated about 1.8 million homes were delinquent or in foreclosure, a so-called “shadow inventory” set to add to the 3.5 million existing homes already on the market.

Toll Brothers Inc. Chief Executive Officer Douglas Yearley Jr. last week said the April through June home selling season, typically the busiest of the year, has been “disappointing” and that “people are still scared.”

To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net; Bob Willis in Washington at bwillis@bloomberg.net

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

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