Factory Output Gain Signals Sustained U.S. Demand: Economy

Photographer: Tim Boyle/Bloomberg

A worker sands a piece of custom furniture at the at Baker Road Furniture manufacturing facility in South Elgin, Illinois. The gain in manufacturing, which accounts for about 12 percent of the economy and 75 percent of total industrial production, reflected increased output of furniture, computers and metals. Close

A worker sands a piece of custom furniture at the at Baker Road Furniture manufacturing... Read More

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Photographer: Tim Boyle/Bloomberg

A worker sands a piece of custom furniture at the at Baker Road Furniture manufacturing facility in South Elgin, Illinois. The gain in manufacturing, which accounts for about 12 percent of the economy and 75 percent of total industrial production, reflected increased output of furniture, computers and metals.

Production at U.S. factories picked up in October, indicating the government shutdown did little to impede manufacturing (IPMGCHNG) at the start of the fourth quarter.

The 0.3 percent advance followed a 0.1 percent gain the prior month and exceeded the 0.2 percent median projection in a Bloomberg survey, figures from the Federal Reserve showed today in Washington. Total industrial production fell 0.1 percent as mining and utility use declined.

Increased output of furniture, metals and electronics shows gains in manufacturing are extending beyond the auto industry, underscoring recent reports of improving sentiment at factories. Busier assembly lines are a source of strength for an economy that was restrained by a decrease in government spending tied to the 16-day partial federal shutdown.

“It’s a good start to the quarter,” said Brian Jones, senior U.S. economist at Societe Generale in New York, who correctly projected the drop in total output. Production gains are “becoming broad-based. Are we going at rocket speed? No, but things are generally getting better in the economy.”

Stocks rose to records, with benchmark gauges capping a sixth week of gains, as investors assessed the data amid speculation the Fed will maintain stimulus. The Standard & Poor’s 500 Index climbed 0.4 percent to 1,798.18 at the close in New York.

Another report today showed a gauge of manufacturing in the New York region unexpectedly declined this month. The Federal Reserve Bank of New York’s general economic index fell to minus 2.2 in November from 1.5 the prior month. Readings less than zero signal contraction in New York, New Jersey and southern Connecticut.

Economists’ Forecasts

The median forecast in a Bloomberg survey also called for a 0.2 percent rise in total industrial production. September output was revised up to a 0.7 percent gain from a previously reported 0.6 percent advance. Estimates of the 84 economists surveyed ranged from a drop of 0.2 percent to an increase of 0.5 percent.

Today’s Fed report also showed that capacity utilization, which measures the proportion of a plant that is in use at factories, mines and utilities, fell to 78.1 percent from 78.3 percent the prior month. At factories alone it increased to a four-month high. Manufacturing accounts for about 75 percent of total industrial production and 12 percent of the economy.

Utility output dropped 1.1 percent after a 4.5 percent surge the previous month. Mining production, which includes oil drilling, decreased 1.6 percent, the biggest drop since February 2011. The decline reflects the temporary shutdowns of oil and gas rigs in the Gulf of Mexico in advance of Tropical Storm Karen, the Fed said.

Vehicle Production

Factory production increased even as assembly lines at automakers slowed for the first time in three months, today’s report showed. Excluding autos and parts, manufacturing production climbed 0.4 percent after no change in September.

“There’s a lot of volatility in these numbers and auto production can be very lumpy,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York. “Manufacturing is on track for pretty solid growth this quarter.”

Motor vehicle sales have been a bright spot in this expansion as Americans take advantage of cheaper borrowing costs to replace older models. Cars and light trucks sold at a 15.2 million (SAARTOTL) annual rate in October, matching the September pace, according to Ward’s Automotive Group data.

‘Modest Pace’

“Economic conditions continue to improve at a modest pace,” Emily Kolinski Morris, senior economist at Ford Motor Co. (F), said on a Nov. 1 call with analysts. “Manufacturing-sector growth continues at a steady pace” and housing data signal there is “a broad-based recovery still in place.”

The pickup in production helps explain why factory purchasing managers were more optimistic last month. The Institute for Supply Management’s manufacturing index climbed in October to 56.4, the highest since April 2011, from 56.2 a month earlier, the Tempe, Arizona-based group’s reported on Nov. 1. Readings above 50 indicate growth.

At the same time, increased inventories and slower economies overseas represent challenges to American manufacturers. The Commerce Department’s data on third-quarter gross domestic product showed the biggest gain in inventories since the beginning of 2012. The build-up in stockpiles, which may limit orders to factories should demand falter, helped the economy climb 2.8 percent at an annualized pace in the third quarter after a 2.5 percent rate in the prior three months.

Cisco Systems

Meantime, Cisco Systems Inc., the world’s largest maker of computer-networking equipment, indicated weakness in some of its export markets and budget gridlock hurt sales.

“The shutdown, debt ceiling negotiations, and delay of key decisions exacerbated the lack of confidence among business leaders we had highlighted over the past few quarters,” John Chambers, chief executive officer, said on a Nov. 13 conference call. He said the impact of the shutdown on the company’s federal business was about $50 million, and slower global growth is also hindering sales.

The U.S. economy will grow 1.9 percent in the final three months of this year, less than the 2.4 percent pace that economists projected in October, according to the median forecast in a Bloomberg survey from Nov. 8 to Nov. 13.

The figure will reflect a decline in government output, estimated by the number of hours put in by federal workers, as well as cutbacks at contractors, economists said.

The effect of the budget impasse on the economy and lack of faster progress in the job market are among reasons that help explain why U.S. central bankers are continuing with $85 billion in monthly asset purchases.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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

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