Factories Boost U.S. Output as Builders Gain Confidence: Economy

American manufacturers are churning out more goods and homebuilders are regaining confidence as evidence mounts that the world’s largest economy is making a comeback after a slow start to 2014.

Output at factories, mines and utilities rose 0.6 percent in May, reflecting gains at makers of automobiles, business equipment and construction supplies, according to Federal Reserve data today in Washington. Builder sentiment this month jumped by the most in almost a year, another report showed.

Improving consumer and business spending means assembly lines will probably remain busy in the second half of the year, giving growth a boost after the expansion sputtered in the first quarter. The reports, which came as the International Monetary Fund cut its 2014 forecast for the U.S., give Fed policy makers meeting this week reason to continue trimming stimulus at a measured pace to ensure the rebound is sustained.

“We’re back on track,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, and the second-best production forecaster over the last two years, according to data compiled by Bloomberg. “Everything is growing at a pretty good clip.”

Stocks fluctuated between gains and losses as investors weighed escalating tension in Iraq against corporate deals and the improving economic data. The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,936.3 at 12:26 p.m. in New York.

The Washington-based IMF today lowered its U.S. growth forecast for this year to 2 percent from an April estimate of 2.8 percent and said the Fed may have scope to keep interest rates near zero for longer than investors expect.

Lagarde’s View

In a press conference today, IMF Managing Director Christine Lagarde said U.S. prospects were looking up and that growth in coming quarters may come in at a 3 percent annualized pace or higher.

The economy may grow at a 3.5 percent annual clip in the second quarter after contracting at a 1 percent pace in the first three months of the year, according to a Bloomberg survey of economists this month. Recent data indicate the slump in the first three months was even larger, approaching 2 percent.

Fed officials led by Chair Janet Yellen, who meet June 17-18, will determine whether the economic outlook is stable enough to warrant another $10 billion reduction in monthly asset purchases from the current $45 billion pace. The central bankers anticipate raising their benchmark federal funds rate next year for the first time since 2006, and will release new forecasts for the economy and the outlook for the benchmark after the end of two days of meetings on June 18.

Survey Results

The median forecast in a Bloomberg survey of 79 economists projected production would increase 0.5 percent in May. Estimates ranged from a 0.1 percent drop to a gain of 0.8 percent. The Fed revised April figures to show a 0.3 percent drop that was smaller than the previously reported 0.6 percent decline.

Manufacturing, which makes up 75 percent of total production, also increased 0.6 percent.

Production of business equipment increased 0.8 percent last month, output of construction materials rose 0.8 percent and carmakers churned out 1.5 percent more autos and parts, today’s report showed. Auto assemblies climbed to an 11.6 million annualized rate in May, the most this year.

“Manufacturing activity is humming along at a fairly constructive pace,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC, who accurately forecast the production gain. “That’s something we expect will continue over the balance of the year.”

Auto Sales

Gains at General Motors Co. (GM) and Ford Motor Co. helped propel a rise in the auto industry’s monthly annualized sales rate last month. Adjusted for seasonal trends, purchases rose to 16.7 million, the highest since February 2007, according to Ward’s Automotive Group.

Ford sees total industry sales for the year of up to 17 million units, including medium and heavy trucks, senior U.S. economist Emily Kolinski Morris said on a June 3 call to discuss May sales.

“Recent readings on housing have improved slightly and the labor market continued its gradual recovery,” she said. “These incoming indicators coupled with the supportive policy backdrop should provide positive momentum for the economy in the current quarter and into the second half.”

Empire State

Another report today showed manufacturing (IPMGCHNG) in one region unexpectedly picked up this month as orders jumped. The Federal Reserve Bank of New York’s factory index rose to 19.3 for June, the highest in four years, from 19 the prior month. Readings greater than zero signal growth for the so-called Empire State Index that covers New York, northern New Jersey and southern Connecticut.

Housing, which lagged behind other industries after mortgage rates jumped in the middle of 2013, is also showing signs of picking up.

The National Association of Home Builders/Wells Fargo sentiment gauge climbed to 49 this month from 45 in May, the biggest gain since July 2013, figures from the Washington-based group showed today.

While the reading was just short of the 50 level that is the dividing line between poor and good conditions, all three components of the gauge improved. Measures of current sales, the outlook for future purchases and prospective buyer traffic were the highest since January.

The increase “is a welcome sign and shows some renewed confidence in the industry,” NAHB Chairman Kevin Kelly, a homebuilder and developer from Wilmington, Delaware, said in a statement. “However, builders are facing strong headwinds, including the limited availability of labor.”

A report tomorrow is projected to show housing starts surpassed the 1 million mark at an annualized rate in May for a second month as the industry recovers from the harsh winter. The pace had slumped to less than 900,000 in January as frigid temperatures in much of the country prevented builders from breaking ground.

To contact the reporter on this story: Victoria Stilwell in Washington at vstilwell1@bloomberg.net

To contact the editor responsible for this story: Carlos Torres at ctorres2@bloomberg.net Vince Golle

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