Growth in Slow Start as U.S. Factories Curb Output: Economy

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Fed: Industrial U.S. Production Rose 0.2% in Jan.

Factory production rose less than forecast in January and home construction fell, showing the U.S. economy is off to a slow start in 2015.

Output at factories climbed 0.2 percent and figures for the previous three months were revised lower, data from the Federal Reserve showed Wednesday in Washington. Total industrial production, which also includes mining and utilities, climbed less than projected as oil-well drilling slumped. Housing starts dropped 2 percent, according to the Commerce Department.

“It’s not weak, but it’s not great either,” said Thomas Costerg, an economist at Standard Chartered Bank in New York, who correctly estimated the gain in factory output. “There are some downside risks, clearly.”

The data bolster Fed concern that struggling economies from Europe to Asia, a stronger dollar and the sluggish recovery in housing pose obstacles that warrant keeping interest rates low for longer. Additionally, while consumers benefit from an improving job market and the plunge in fuel costs that is curbing inflation, American drillers and miners are likely to trim spending, moderating a former source of strength.

Many Fed policy makers “indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time,” according to minutes of the Jan. 27-28 Federal Open Market Committee meeting released on Wednesday in Washington.

Fed Minutes

The committee, while considering risks to be “nearly balanced,” pointed to the strengthening dollar, international flash points and slow wage growth as weakening the case for the first rate rise since 2006.

The Standard & Poor’s 500 Index erased a loss, after climbing to a record on Tuesday, as speculation that the Fed will delay a rate increase overshadowed a drop in energy shares. The S&P 500 Index slipped less than 1 point to 2,099.68 at 4 p.m. in New York, after losing as much as 0.4 percent. The yield on the benchmark 10-year note decreased to 2.08 percent from 2.14 percent late on Feb. 17.

The January gain in factory output was weaker than the 0.4 percent advance projected in a Bloomberg survey of economists.

The gain in manufacturing output, which accounts for about 12 percent of the economy, followed no change a month earlier. Total industrial production increased 0.2 percent last month after a 0.3 percent decline. It was forecast to rise 0.3 percent in January.

Mining, Drilling

Mining, which includes oil drilling, fell 1 percent in January after climbing 2.1 percent in December. Drilling of oil and gas wells slumped 10 percent, the fourth straight decline and the biggest decrease since March 2009.

After several months of falling energy costs, oil companies, including Houston-based Apache Corp., are paring production. The “dramatic and almost unprecedented” price plunge prompted the company to cut operating rigs by 70 percent by the end of this month, Chief Executive Officer John J. Christmann said on an earnings call last week.

Factory production of motor vehicles and parts fell 0.6 percent after a 1.3 percent decline. Auto assemblies slowed to an 11.76 million annualized rate after 11.93 million a month earlier, the Fed said.

Sales of cars and light trucks eased to a 16.6 million annualized rate in January after 16.8 million in December, according to figures from Ward’s Automotive Group.

Port Slowdown

A work slowdown at West Coast ports may be hindering automakers. Honda Motor Co. said it was considering halting some U.S. vehicle production as the nine-month labor dispute hampers deliveries of parts and supplies.

While output of consumer goods and business equipment rose in January, the gains followed bigger declines a month earlier. Production of construction supplies fell.

The drop in housing starts last month reflected a decrease in the number of single-family projects from December’s almost seven-year high. Student debt, tight credit conditions and higher prices are probably preventing would-be first-time homebuyers from entering the market.

Home-price growth accelerated in much of the U.S. in the fourth quarter. The median price of an existing single-family home rose from a year earlier in 86 percent of the 175 metropolitan areas measured, the National Association of Realtors said in a Feb. 11 report. Twenty-four areas had price gains of 10 percent or more, up from 16 regions in the third quarter. Prices declined in 24 areas.

“We see the housing recovery continuing this year,” said Robert Stein, deputy chief economist at First Trust Portfolios LP in Wheaton, Illinois. “It’ll be choppy, but we’ll see consistent improvement over the previous year.”

Multifamily Projects

In contrast, work on multifamily dwellings, such as townhouses and apartment buildings, climbed to the highest level since July.

Building permits, a proxy for future construction, declined 0.7 percent in January to a 1.05 million pace, also reflecting fewer applications for the construction of single-family houses.

Another reason Fed officials can be patient in raising interest rates is that inflation remains tame. A report from the Labor Department on Wednesday showed a 0.8 percent drop in the producer-price index, the biggest since the series began in November 2009, led by plunging energy costs.

The core measure, which excludes energy and food, was unchanged over the past 12 months.

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