New York Index Shows U.S. Factories on the Mend: Economy

Manufacturing in the New York region unexpectedly rebounded in February, a sign factories will help sustain the U.S. economic expansion after a brief slowdown at the start of the year.

The Federal Reserve Bank of New York’s Empire State index climbed to 10 from minus 7.8 in January, exceeding all forecasts in a Bloomberg survey. It was the highest since May 2012. Readings greater than zero signal growth in New York, northern New Jersey and southern Connecticut. Other data showed factory production throughout the U.S. dropped in January following the biggest two-month advance in three decades.

“Manufacturing should be a source of growth this year,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, whose forecast matched the highest for the New York index in the Bloomberg survey. “We are having to reevaluate the phenomenal resiliency of the U.S. economy and perhaps its ability to outstrip expectations.”

A pickup in consumer and business spending toward the end of 2012 and stabilization in overseas markets including China and Europe will help sales at companies such as Deere & Co. and Eaton Corp Plc. Another report today showing consumer sentiment improved in February for a second month eases concern households will retrench following an increase in the payroll tax.

Stocks declined, after the Standard & Poor’s 500 Index reached a five-year high, as Wal-Mart Stores Inc. tumbled. The S&P 500 dropped 0.1 percent to 1,519.79 at the close in New York.

U.K. Sales

Overseas, a report showed retail sales in the U.K. unexpectedly fell in January for a second consecutive month as cold weather kept consumers at home and incomes remained under pressure, hurting spending on food, household goods and fuel.

The median projection in the Bloomberg survey of 50 economists called for the New York factory gauge to improve to minus 2 from minus 7.8 in January. Estimates ranged from minus 7 to a high of 5.

The gauge of new orders increased in February to the highest reading since May 2011, while shipments and employment also advanced.

The improvement makes it more likely that a January slowdown will be short-lived. Production in manufacturing, which accounts for about 12 percent of the economy, dropped 0.4 percent last month after jumping 1.1 percent in December and 1.7 percent in November, the biggest back-to-back gain since January and February 1984, according to figures from the Federal Reserve in Washington.

Total output, including factories, mines and utilities, fell 0.1 percent after a 0.4 percent gain in December.

January ‘Payback’

“January showed a bit of a payback after the strength in manufacturing toward the end of 2012,” said Sam Coffin, an economist at UBS Securities LLC in Stamford, Connecticut, who projected a 0.3 percent drop in factory output. “Manufacturing will be growing pretty rapidly as companies have to restock inventories, and there’s overseas as well as domestic demand. We’re on a slightly better path now.”

The decrease was paced by a slowdown in auto output that may soon be reversed as sales strengthen. Cars and light trucks sold at a 15.2 million annual rate in January after 15.3 million in December, data from Ward’s Automotive Group showed. Including November’s 15.5 million rate, auto sales over the past three months have been the strongest in five years.

Improving household confidence raises the odds demand will hold up. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment climbed to 76.3 this month from 73.8 in January, another report showed today. The gauge was projected to rise to 74.8, according to the median forecast in a Bloomberg survey.

Boosting Confidence

Increased property values, a strengthening job market and stocks at five-year highs are providing a boost to Americans’ balance sheets. A pickup in wealth would help make up for recent gains in gasoline prices and the hit to take-home pay from a two percentage-point increase in the payroll tax that took effect in January.

“We saw a meaningful improvement in overall financial market conditions and home prices, and those are the kind of drivers now for consumer confidence,” said Millan Mulraine, director of U.S. rates research at TD Securities USA LLC in New York, who projected a sentiment reading of 76. “As attitudes continue to improve, we are likely to see that possibly be reflected in improved spending.”

Increases in household purchases and firming growth in Asia and Latin America will probably spur gains in manufacturing.

Global Demand

Deere, the largest agricultural equipment maker, raised its full-year profit forecast and posted quarterly earnings that topped analysts’ estimates. First-quarter revenue from machinery gained 18 percent in the U.S. and Canada and 2 percent in the rest of the world, the Moline, Illinois-based company said.

“John Deere has entered 2013 on a strong pace,” Susan Karlix, manager of investor communications, said on a Feb. 13 conference call with analysts. “Our key markets remain in good shape, for the most part, and we’re looking for another solid year.”

Eaton, an industrial equipment manufacturer, also is poised to gain from improving demand. China’s economy is accelerating while in the U.S., housing and non-residential construction will help drive economic growth, Chairman and Chief Executive Officer Sandy Cutler said in an interview following Eaton’s quarterly earnings report on Feb. 4.

President Barack Obama, in his State of the Union address this week, unveiled proposals to revive manufacturing and create jobs, as falling energy prices in the nation and rising labor costs in China make U.S. producers more competitive. His ideas included efforts to bolster clean energy subsidies, hire hundreds of people to lobby foreign companies to open U.S. plants, end tax breaks to firms that ship jobs overseas, and expand free-trade pacts.

To contact the reporters responsible for this story: Michelle Jamrisko in Washington at mjamrisko@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net

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

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