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Economy Not Double-Dipping Yet as Production-to-Consumer Spending Increase

Some of the gloom that settled over the U.S. economic outlook as stocks and sentiment plunged in recent weeks may soon dissipate as households keep spending and factories keep producing.

Industrial output climbed in July by the most this year, according to figures from the Federal Reserve yesterday. Reports last week showed retail sales rose by the most in four months and claims for jobless benefits dropped to the lowest level since early April.

“There’s nothing in here to suggest the economy is slowing, let alone declining,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Production continues, and production continues because consumers are still making their purchases.”

Profits at companies ranging from Home Depot Inc. to Macy’s Inc. (M) are beating analysts’ estimates as sales increase, showing household spending may be picking up after stalling in the second quarter. Cisco Systems Inc. shares soared last week as demand for its networking equipment improved, hinting at a pickup in business investment.

“You look at what companies are saying in their earnings calls and there is no indication that companies are cutting back abruptly in their hiring or spending,” said Neil Dutta, an economist at Bank of America Merrill Lynch in New York. “While recession risks are on the rise, a recession is not baked in the cake and the data bear that out.”

Yesterday’s report from the Fed showed that the 0.9 percent increase in production at factories, mines and utilities followed a revised 0.4 percent gain that was more than previously estimated. Economists projected a 0.5 percent rise in July, according to the median estimate in a Bloomberg News survey.

Auto Rebound

Production of automobiles and parts surged 5.2 percent last month, a rebound from the supply-chain disruptions that resulted following the March earthquake in Japan, the Fed report showed. Excluding motor vehicles, manufacturing climbed 0.3 percent after a 0.2 percent gain in the prior month.

Business equipment production rose 0.6 percent in July following a 0.2 percent gain in June. Output of computers and electronic products increased 0.5 percent after a 0.8 percent decline in June. Furniture production rose 0.7 percent after a 2.4 percent decrease.

Those gains are reflected in second-quarter profit at Atlanta-based Home Depot, the largest U.S. home improvement retailer, which raised its full-year profit forecast yesterday. Cisco, the world’s largest maker of networking equipment, last week reported fiscal fourth quarter profit that beat analysts’ estimates.

Order Books, Visibility

“We’re not hearing a lot of concern, I would say, from our customers in terms of their order books, in terms of their visibility,” James Squires, chief financial officer at Norfolk Southern Corp. (NSC), the second-biggest eastern U.S. railroad, said on a July 26 conference call with analysts. “We’re not hearing anything negative about the second half.”

On the consumer side, retailers are benefiting as households continue to spend. Sales climbed 0.5 percent in July, the most in four months, following a 0.3 percent gain in June that was larger than previously estimated, according to Commerce Department figures released last week.

Target Corp., the second-largest U.S. discount retailer, posted a 3.7 percent gain in second-quarter profit that surpassed analysts’ estimates, driven in part by improved sales.

Income at Target

Net income rose to $704 million, or $1.03 a share, from $679 million, or 92 cents, a year earlier, the Minneapolis-based company said today in a statement. Analysts projected 97 cents, the average of 19 estimates compiled by Bloomberg.

Target has limited store openings during the past two years and pursued sales growth by adding grocery sections and offering discounts on items purchased with a store-issued debit or credit card. Those initiatives helped same-store sales in the quarter rise the most since 2007.

Wal-Mart Stores Inc., the world’s largest retailer, yesterday boosted its profit forecast for the year. The Bentonville, Arkansas-based firm said that second-quarter sales at the company’s U.S. stores open at least a year were unchanged from a year earlier, excluding fuel, after falling the eight previous quarters. Excluding fuel, sales at the company’s Sam’s Club locations open at least a year gained 5 percent.

Credit Standards

More consumers and businesses are gaining access to credit as lending conditions are easing. Banks loosened credit standards on most types of loans in the second quarter, with commercial and industrial lenders citing “aggressive competition” as a reason for the easier terms, according to a Fed survey released Aug. 15.

The Standard & Poor’s 500 Index closed down 1 percent at 1,192.76 yesterday after rallying 7.5 percent in the three previous sessions, its biggest jump since March 2009.

Warren Buffett’s Berkshire Hathaway Inc. increased its stake in Wells Fargo & Co., adding 9.7 million shares of the biggest U.S. home lender in the three months ended June 30, boosting the holding by 2.8 percent, Omaha, Nebraska-based Berkshire said Aug. 15 in a filing that listed its U.S. stockholdings.

Berkshire accelerated purchases on Aug. 8 as the S&P 500 plunged 6.7 percent, its steepest decline since December 2008.

Bernanke and Fed

Fed Chairman Ben S. Bernanke and his policy-making colleagues pledged on Aug. 9 to hold the main interest rate at a record low near zero at least until mid-2013, saying economic growth is “considerably slower” than anticipated.

“The economy at the margin was picking up some momentum at the start of the third quarter,” Dutta said. “If the labor market holds together, then the economy holds together. Sentiment has overreacted somewhat relative to economic fundamentals.”

Concerns about the economy earlier this month were reflected in Aug. 10 comments by members of the Business Cycle Dating Committee of the National Bureau of Economic Research, the official arbiter of when recessions start and end.

“The sum total of the indicators over the last six months” points to “increased recession risk over the coming year,” said Jeffrey Frankel, a panel member and professor at Harvard University.

July Employment

American employers added more jobs than forecast in July and the unemployment rate fell for the first time in four months. Payrolls rose by 117,000 workers after a 46,000 increase in June that was larger than earlier estimated, the Labor Department said Aug. 6. The jobless rate dropped to 9.1 percent.

The U.S. is not the only country reporting better-than- forecast economic data in the past week. Japan’s economy, the third-largest in the world, contracted less than estimated in the second quarter, figures showed Aug. 15.

Most indicators in Japan from the quarter started July 1 point to an economic rebound, with industrial production rising for three straight months since plunging in March. Companies are also forecasting they will boost output this month to make up for lost capacity resulting from the natural disaster.

“There are plenty of worries, there are plenty of fears, but so far the fears are completely unfounded,” Rupkey said. “Bad things have not happened. We’ve been pleasantly surprised.”

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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

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