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Factory Slowdown Shows U.S. Has Little Traction: Economy

The 0.1 percent advance in U.S. manufacturing followed a revised 0.5 percent gain in August that was smaller than initially estimated, figures from the Federal Reserve showed today in Washington. Photographer: Scott Eells/Bloomberg
The 0.1 percent advance in U.S. manufacturing followed a revised 0.5 percent gain in August that was smaller than initially estimated, figures from the Federal Reserve showed today in Washington. Photographer: Scott Eells/Bloomberg

Oct. 28 (Bloomberg) -- Factory output rose less than forecast in September and contract signings for U.S. home purchases fell the most in three years, showing the economy was having trouble gaining traction before the government shutdown.

The 0.1 percent advance in manufacturing followed a revised 0.5 percent gain in August that was smaller than initially estimated, figures from the Federal Reserve showed today in Washington. Pending sales of previously owned homes slumped 5.6 percent in September, the fourth straight month of declines, the National Association of Realtors reported.

“The economy is in a shutdown-related soft patch in the fourth quarter,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, who correctly predicted a 0.6 percent gain in total industrial production, which also includes mines and utilities. “Everyone started to be a little more cautious in September.”

Advances in housing and manufacturing would help generate the employment gains sought by Fed policy makers, who begin a two-day meeting tomorrow. A pickup in consumer and business sentiment depends in part on how companies and households respond to an agreement by lawmakers that funds the government into early next year.

Stocks rose, leaving the Standard & Poor’s 500 Index poised for the best annual gain since 2003, as the weaker economic data fueled bets the Fed will maintain stimulus. The S&P 500 climbed 0.1 percent to 1,762.11 at the close in New York.

Mortgage rates last month reached two-year highs, reducing affordability at the same time prices rose. With some would-be buyers pushed to the sidelines, the pace of recovery in real estate is cooling.

Fourth Quarter

“We’ll be in this weakness for a little bit, maybe even going into the fourth quarter,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, the second-best forecaster of pending home sales over the past two years, according to data compiled by Bloomberg.

Last month’s drop in pending home sales was the biggest since a 28.9 percent plunge in May 2010, when the extension of a government tax credit expired.

Today’s Fed data showed that factory output, excluding a pickup in motor vehicle assemblies was stagnant after a 0.2 percent August gain as production of appliances, electronics and chemicals weakened. Economists projected a 0.3 percent increase in manufacturing, which accounts for about 75 percent of total output, according to the median forecast in a Bloomberg survey.

Total industrial production last month was boosted as higher temperatures drove up electricity use. The median forecast of 85 economists surveyed called for a 0.3 percent September gain.

Global Manufacturing

Manufacturing in Europe is also having trouble strengthening. An index of factory output in the euro area increased to 51.3 in October from 51.1 a month earlier and 51.4 in August, according to London-based Markit Economics.

Factory production in China has shown signs of picking up. Industrial output in September climbed 10.2 percent from the same month last year, according to Oct. 18 figures from the Beijing-based National Bureau of Statistics. In June, the year-over-year increase was 8.9 percent.

Today’s Fed report also showed that factory capacity utilization, which measures the amount of a plant that is in use, held at 76.1 percent. In February, it reached an almost five-year high of 76.5 percent.

Mining production, which includes oil drilling, rose 0.2 percent after a 0.6 percent gain. Utility output jumped 4.4 percent, the most since March, after falling for five straight months.

Warmer September

The average temperature last month was 67.3 degrees Fahrenheit (19.6 Celsius), making it the sixth-warmest September on record, according to the National Oceanic and Atmospheric Administration. The agency’s index on residential energy demand showed September was 9 percent above average.

Factory production of non-durable goods declined 0.3 percent in September, the third straight decrease. Output of textiles dropped 0.7 percent, while production of chemicals fell 0.6 percent.

Dow Chemical Co., the largest U.S. chemical maker by revenue, this month reported profit that trailed analysts’ estimates amid higher costs and lower sales in the unit that makes epoxy, used in plywood and can linings.

Demand for motor vehicles has been a bright spot for manufacturers, with cars and light trucks selling at a 15.2 million annualized rate in September after climbing in August at the fastest pace since 2007, figures from Ward’s Automotive Group showed.

Vehicle Production

Production of motor vehicles and parts climbed 2 percent after a rising 5.2 percent a month earlier, today’s report showed. Automaker assemblies rose to an 11.55 million annualized rate in September, the most since June 2006.

Ford Motor Co. earned a $2.3 billion profit in North America in the third quarter and raised its forecasts for pretax profit and operating margin for the full year. The Dearborn, Michigan-based company said last week that its automotive sales rose 12 percent to $33.9 billion. It also earned a rare profit on overseas operations on rising demand for Focus compact cars in China and B-Max vans in Europe.

Eaton Corp., which makes electrical equipment for buildings and hydraulics for machinery, is seeing steady, albeit slow, improvement in the U.S. economy, Chief Executive Officer Sandy Cutler said during an Oct. 25 conference call. The U.S. accounted for about half of Eaton’s revenue in 2012.

‘Gradually Improving’

Cutler said the economy is “gradually improving” while not “rocketing back” in the U.S. He forecast an increase in demand in the company’s markets of as much as 4 percent next year, spurred by economic recovery in Europe.

“The biggest turnaround in a region is likely be Europe,” Cutler said in an Oct. 25 telephone interview. “Whether you think growth’s a half-point positive or a point positive, it’s sure going to be better than negative 1 percent for a couple of years in a row.”

A recovery in the company’s orders in the third quarter has marked a “change in momentum,” Cutler said. Eaton, which is based in Dublin and operates from Cleveland, is forecasting zero growth for its markets this year, he said.

To contact the reporter on this story: Jeanna Smialek in Washington at; Lorraine Woellert in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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