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Factories in U.S. Show Resilience as Production Rises: Economy

Industrial production increased in June, paced by gains among auto and machinery makers that may ease concern some of the drivers of the U.S. economic expansion were floundering.

Output at factories, mines and utilities rose 0.4 percent last month after a revised 0.2 percent drop in May that was larger than previously reported, according to Federal Reserve data issued today in Washington. Other figures showed consumer prices were unchanged and homebuilder confidence jumped.

Fed Chairman Ben S. Bernanke today acknowledged the recovery had lost momentum in the first half of the year as a result of the European crisis and the prospect of fiscal tightening. Factories still face challenges of a slower global economy and an American consumer hobbled by 8.2 percent unemployment and stagnant income growth.

“Production is showing some signs of life,” said Robert Brusca, president of Fact & Opinion Economics in New York, who correctly projected the gain in output. “If you look at all of the data, what you see is an economy that is mixed. The industrial production report is one of the stronger pieces of data we have.”

Stocks fluctuated between gains and losses as Bernanke, in testimony before the Senate, refrained from detailing specific steps the central bank could take to boost the world’s largest economy. The S&P 500 Index was at 1,353.53 at 11:42 a.m. in New York, down less than 0.1 percent from yesterday’s close.

Bernanke’s View

“The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year,” Bernanke said. The Fed is “prepared to take further action as appropriate to promote a stronger economic recovery,” he said, echoing the policy makers’ statement following their last meeting in June.

The cost of living was little changed in June, underscoring Fed expectations that inflation will remain under control, another report today showed. No change in the consumer-price index followed a 0.3 percent drop in May, according to Labor Department data. The measure matched the median forecast of economists in a Bloomberg News survey. The so-called core measure that excludes volatile food and fuel costs rose 0.2 percent for a fourth month.

Another report today showed confidence among homebuilders climbed in July to the highest level in five years, indicating further improvement in residential real estate. The National Association of Home Builders/Wells Fargo sentiment index rose 6 points to 35 this month. The gauge exceeded the most-optimistic projection in a Bloomberg survey of 46 economists. Readings below 50 mean more respondents said conditions were poor.

Builder Sentiment

The sentiment reading was the highest since March 2007 and this month’s jump was the biggest since September 2002.

Elsewhere today, German investor confidence declined in July for a third month as the euro area’s debt crisis and cooling global demand dimmed the economic outlook.

Economists forecast industrial production would climb 0.3 percent, according to the Bloomberg survey median. Projections from the 81 estimates ranged from a decline of 0.8 percent to an increase of 0.9 percent. May’s industrial production figure was previously reported as a 0.1 percent drop.

Manufacturing, which makes up about 75 percent of total production, rose 0.7 percent last month, reversing the prior month’s decline.

The Fed’s production report showed motor vehicle output climbed 1.9 percent in June after a 2.2 percent decrease the month before. Machinery output increased 2.3 percent following a 0.5 percent decrease.

Auto Sales

Autos, a recent source of manufacturing strength, sold at a 14.1 million annual rate in June, up from the 13.7 million rate in May that was the weakest this year, according to data from Ward’s Automotive Group.

Factory output excluding production of vehicles and parts climbed 0.6 percent after dropping 0.5 percent. Output of business equipment increased 1.6 percent after a 0.1 percent gain in May, a sign business investment was holding up.

Today’s report contrasts with figures released earlier this month that showed manufacturers curbed production in June. The Institute for Supply Management’s manufacturing index, a national barometer of factory activity, unexpectedly shrank, the first contraction in three years. The index’s measures of orders, production and exports also dropped to three-year lows.

“The economic and political headwinds we’ve been facing, particularly in Europe, have not been easy to overcome,” Joseph Gingo, chairman and chief executive officer of plastics-maker A Schulman Inc. (SHLM), said during a July 10 earnings call. “I don’t see the economic climate for a while improving, dramatically at least. And I think a lot of people are going to become stressed as they were in 2009.”

Output Cooling

The Fed’s data today also showed that manufacturing, while expanding and contributing to growth, has lost some momentum. Factory production climbed 0.7 percent in the three months ended June, compared with a 1.2 percent gain in the first three months of 2012.

“Growth has certainly downshifted,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. “There has clearly been a slowing. Not a collapse, but a slowing.”

To contact the reporter on this story: 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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