Output Slump in Unexpected Area Blindsides U.S. Factories
American manufacturers are suffering from whiplash: Just as one area begins to perk up, another lapses into a funk.
A slump in output of military hardware and of non-durable goods such as food and fuel triggered an unexpected 0.2 percent drop in industrial production, according to data from the Federal Reserve issued Monday. More typical factory mainstays, including autos, machinery and business equipment, showed signs of life.
While data for non-durables tends to be noisy, “the big picture is that manufacturing activity has gone nowhere,” said John Ryding, chief economist at RDQ Economics in New York. “Manufacturing was a big source of economic activity in 2014, and now it’s not contributing at all in 2015.”
American factories have been forced to cut back as the jump in the value of the dollar that began last year hurts exports, while the plunge in oil prices curbs investment in drilling equipment. At the same time, signs that consumers are starting to open their wallets are supporting automakers and homebuilders, which could give the world’s largest economy a bigger boost later this year.
Builder Confidence
Another report Monday showed confidence among homebuilders rebounded in June to a nine-month high as warmer weather and a brighter economic outlook drew prospective buyers back to the market. The National Association of Home Builders/Wells Fargo builder sentiment gauge rose to 59 this month, the strongest since September and exceeding all projections in a Bloomberg survey, from 54 in May.
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The group’s measures of current sales and the outlook for demand in the next six months climbed to the highest levels since 2005.
“The overall assessment in housing activity is favorable - - it’s still very weak, but at least it’s headed in the right direction,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities LLC in New York. “If builders are confident, they will build, and it means that they’re seeing something that’s not reflected yet in the underlying sales numbers.”
Stocks dropped for a second day after weekend negotiations between Greece and its creditors broke down. The Standard & Poor’s 500 Index declined 0.5 percent to 2,084.43 at the close in New York.
Bloomberg Survey
Industrial production was projected to rise 0.2 percent, with estimates ranging from a drop of 0.3 percent to a 0.6 percent gain, according to a Bloomberg survey of 82 economists. April data were revised to show a 0.5 percent drop compared with a previously reported 0.3 percent decrease.
Output of consumer products decreased 0.3 percent last month, led by a 0.7 percent drop for non-durable goods. Production of durable goods, those made to last at least three years, rose 1.1 percent as makers of autos and electronics revved up.
“Manufacturing activity is still in the recovery process from the impact of the strong dollar and the impact of the cuts in the oil and gas space, and we haven’t fully worked through those effects yet,” said Aneta Markowska, chief U.S. economist at Societe Generale in New York, which is the best forecaster of factory activity over the last two years, according to data compiled by Bloomberg. As the declines in energy fade, “I would expect some rebound,” she said. “We’ve had stronger demand domestically and that should offer some lift to manufacturing.”
Mining Output
Mining production, including oil drilling, fell 0.3 percent last month, the fifth consecutive decrease. Drilling and servicing at wells declined 7.9 percent as companies seek to balance supply with demand amid a global oil glut.
Consumers’ appetites for new cars continue to support production. Output of motor vehicles and parts increased 1.7 percent after rising 2 percent a month earlier. Excluding autos and parts, factory production declined 0.3 percent last month after being little changed in April.
“We expect that the U.S. economic growth is regaining momentum in the second quarter,” Yong Yang, senior economist at Dearborn, Michigan-based Ford Motor Co., said on a June 2 sales call. “As the business environment for manufacturing has become more supportive in recent months, manufacturing activity will likely pick up.”
Production of business equipment climbed 0.2 percent in May, and machinery output increased 0.4 percent.
‘Unusual’ Weakness
“The fact that the weakness comes from an unusual place could be viewed as a little anomalous,” said Jeremy Schwartz, an economist at Credit Suisse in New York, referring to the drop in non-durables. “The fundamental strength in durables is a positive sign. We are pretty confident that the overall picture is going to be all right.”
Other data are at odds with the prolonged slowdown signaled by the Fed’s industrial production report. The Institute for Supply Management’s factory index rose to a three-month high of 52.8 in May from 51.5 in April, figures from the Tempe, Arizona-based group showed earlier this month.
A pickup in bookings and the strongest reading for order backlogs since November pointed to a rebound in production.