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Factories Churning Out More Goods Buoy U.S. Growth: Economy

Production at U.S. Factories Increases on Autos, Machinery
Ford Motor Co. employee Josh Salenbien on the assembly line in Wayne, Michigan on Dec. 14, 2011.Photographer: Jeff Kowalsky/Bloomberg

Factories in the U.S. boosted production in January, capping the biggest back-to-back increases in more than two years, showing manufacturing will remain at the forefront of the expansion.

Output rose 0.7 percent after a revised 1.5 percent gain in December, the best two-month performance since July and August 2009, when the world’s largest economy was emerging from the recession, according to figures issued by the Federal Reserve today in Washington. Other reports showed homebuilders turned less pessimistic in February and manufacturing in the New York region grew.

Business investment in new equipment and the need to rebuild inventories as sales improve will probably keep factory assembly lines rolling at the start of 2012. Additionally, a more stable residential real-estate market would remove an impediment to the recovery after declines in home construction subtracted from economic growth in each of the past six years.

“Factories remain a major supporting element of the economy as we enter 2012,” said Richard DeKaser, deputy chief economist at Parthenon Group LLC in Boston. “The latest reading from the homebuilders adds to the steady stream of upbeat news on the housing sector.”

Stocks fell, sending the Standard & Poor’s 500 Index lower for a second day, as concern grew that Greece was moving closer to default and the Fed said policy makers were divided on buying more assets. The S&P 500 dropped 0.5 percent to 1,343.23 at the close in New York.

FOMC Minutes

A few members of the Federal Open Market Committee said the central bank may have to consider more asset purchases, while others said the economic outlook would have to deteriorate first, according to minutes of their Jan. 24-25 meeting released today.

Total industrial production, which comprises factories, utilities and mining companies, was little changed last month, less than the 0.7 percent gain projected by the median forecast of 81 economists surveyed by Bloomberg News. Estimates ranged from gains of 0.1 percent to 1.2 percent.

Output at utilities slumped 2.5 percent last month as the fourth-warmest January on record cut into electricity and natural gas use. A 1.8 percent drop in mining, which includes oil drilling, also hindered total industrial output.

‘Driving Role’

“Manufacturing is doing pretty well,” said Tom Simons, an economist at Jefferies & Co. Inc. in New York. “It will continue to play a driving role in the economy. Global demand is holding up pretty well, we’re still rebuilding inventories and autos remain a significant leader in the factory recovery.”

Early indications are that factories continue to expand this month. The Fed Bank of New York’s general economic index increased to 19.5 from 13.5 in January, the branch of the central bank reported today. It was the best reading for the so-called Empire State Index since June 2010.

The gauge, which covers New York, northern New Jersey, and southern Connecticut, exceeded all forecasts in a Bloomberg News survey.

Homebuilder confidence improved more than estimated in February, indicating the industry is stabilizing, data from National Association of Home Builders/Wells Fargo showed. The group’s sentiment gauge climbed to 29, the highest level since May 2007, from 25 in January. The median forecast of economists surveyed by Bloomberg called for a rise to 26. Readings below 50 still mean more respondents said conditions were poor.

Housing Fragile

“The housing market is moving toward more sustainable growth,” Barry Rutenberg, chairman of the National Association of Home Builders and a builder from Gainesville, Florida, said in a statement. At the same time, the industry remains fragile, he said.

The Fed’s national production report for January showed output of motor vehicles and parts jumped 6.8 percent, today’s figures show. Manufacturing excluding autos and parts climbed 0.3 percent following a 1.3 percent December increase.

Production of business equipment increased 1.8 percent, boosted by more output of computers and transportation gear.

Purchases of cars and light trucks climbed to an annualized rate of 14.1 million last month, the highest since the so-called cash-for-clunkers program in August 2009 and the second-strongest since May 2008, according to Autodata Corp. Sales averaged 16.4 million in the two years before the last recession began in December 2007.

With the average age of cars and trucks rising to a record 10.8 years, analysts see pent-up demand boosting U.S. sales to a third-straight annual gain in 2012, the longest streak since sales peaked in 2000.

Ford Profits

Ford Motor Co., the second-largest U.S. automaker, reported its 11th consecutive profitable quarter as sales rose and it boosted North American production by 14 percent. The Dearborn, Michigan-based company U.S. sales rose 11 percent last year. Ford sees its European market worsening while Asia-Pacific will remain solid.

“Autos are benefiting from rising replacement demand and businesses have been more forthcoming with investment as economic uncertainty has diminished,” Parthenon’s DeKaser said.

Manufacturers and exporters of heavy equipment such as Caterpillar Inc. continue to see growth. Caterpillar, the largest construction and mining-equipment maker, last month posted fourth-quarter earnings and forecast full-year profit that topped analysts’ estimates as demand rose for earth-moving machinery and trucks. The Peoria, Illinois-based manufacturer said it had a record $29.8 billion backlog of orders at the end of 2011.

Caterpillar Investment

“For many products demand has been above our ability to produce,” Caterpillar spokesman Michael DeWalt told a conference call on Jan. 26. “We have invested in Caterpillar factories in the United States and around the world to increase production.”

Total industrial output last month was tempered by the drop in utility use because January was relatively mild. The National Oceanic and Atmospheric Administration reported the average temperature was 36.3 degrees Fahrenheit, 5.5 degrees above the 1901-2000 long-term average.

Elsewhere today, Europe’s economy shrank less than economists forecast in the fourth quarter as a better-than predicted performance in Germany and France helped mitigate the region’s first contraction since 2009.

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