U.S. Industrial Production Rises 0.3% on Equipment Demand

Production at U.S. factories climbed more than forecast in December and the cost of living was little changed, showing the economy gained momentum entering 2013 while inflation remained at bay.

Manufacturing output advanced 0.8 percent after jumping 1.3 percent in November, the strongest back-to-back reading in almost a year, Federal Reserve figures showed today. The Labor Department said its consumer-price index was unchanged last month, capping the third-smallest annual gain in a decade.

Rebounds in housing, the auto industry and business investment combined with stabilization in global growth will probably support gains in manufacturing into this year. The lack of inflation and an improving job market are also helping boost Americans’ buying power, easing the risk that household spending will slump as the budget battles in Washington shake confidence.

“We’re likely to start this year on much firmer footing than we did last year,” said Millan Mulraine, an economist at TD Securities LLC in New York. “We’re moving in a positive direction.”

The Fed said today in its Beige Book business survey that the economy picked up across much of the nation last month, boosted by sales of cars and homes.

“Economic activity has expanded since the previous Beige Book report, with all 12 districts characterizing the pace of growth as either modest or moderate,” the central bank said in its survey, which is based on reports from the Fed’s district banks.

Stock Prices

Most stocks fell on concern about Europe’s economy and after the World Bank’s downgrade of global growth. More than three stocks dropped for every two advancing on U.S. exchanges as of 4 p.m. in New York. The Dow Jones Industrial Average retreated 0.2 percent to 13,511.23 at the close. The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,472.63.

German Chancellor Angela Merkel’s government today cut its growth forecast for Europe’s biggest economy as austerity policies in cash-strapped euro-region countries and cooling world trade damp exports.

The Washington-based World Bank late yesterday projected the global economy will expand 2.4 percent this year, down from a June forecast of 3 percent, after growing 2.3 percent in 2012.

The Fed’s production report showed total output, which includes utilities and mining, increased 0.3 percent in December, restrained by the biggest plunge in electricity use in six months as the weather turned unseasonably mild.

Consumer Spending

“To the extent that the performance of the manufacturing sector reflects pending consumption, it suggests sustained improvement in consumer spending this quarter,” said Mulraine, who correctly projected the increase in total production.

Last month was the second-warmest December in U.S. records going back to 1958, according to the National Oceanic and Atmospheric Administration.

The median forecast of 85 economists surveyed by Bloomberg projected total industrial production would rise 0.3 percent. Estimates ranged from a drop of 0.2 percent to an increase of 0.6 percent.

The two-month increase in manufacturing output, which accounts for about 12 percent of the economy, was the biggest since December 2011 and January 2012. It reflected in part a rebound from the damage caused by superstorm Sandy in October.

Production Breakdown

The report showed the influence of the auto industry and the rebound in business investment and housing.

Output of business equipment rose 1.3 percent in December after a 2 percent gain the prior month. Production of construction supplies advanced 1 percent.

The output of motor vehicles and parts increased 2.6 percent after a 5.8 percent surge a month earlier.

Autos remain a source of demand, according to other reports. General Motors Co. and Ford Motor Co., the two largest automakers by U.S. sales, topped analysts’ estimates last month and forecast that industry deliveries will keep rising in 2013. Cars and light trucks sold at a 15.3 million annual pace in December after a 15.5 million rate in November, the best two months since early 2008, data from Ward’s Automotive Group showed.

Global Growth

A turnaround in foreign markets also will probably boost output at American factories. Exports advanced 1 percent in November after declining the prior month. Portland, Oregon-based Schnitzer Steel Industries Inc., a steel recycler, is among companies watching for signs of better overseas sales.

“The global economic outlook remains challenging, but we’re cautiously optimistic that market conditions are modestly improving,” Tamara Lundgren, president and chief executive officer, said on a Jan. 8 conference call. “China is clearly exhibiting stronger performance,” and Europe is stabilizing.

China’s exports jumped 14.1 percent in December from the same month a year earlier, the biggest 12-month gain since May, customs administration data showed on Jan. 10. Among other data, a broad measure of credit surged 28 percent from December 2011, according to the central bank.

Another report today reinforced that housing in the U.S., whose slump precipitated the recession, is making a comeback. Confidence among U.S. homebuilders held in January at the highest level in more than six years, according to data from the National Association of Home Builders/Wells Fargo. The group’s sentiment index was 47, matching December’s reading as the highest since April 2006.

Inflations Ebbs

Growing demand is not spurring inflation. The unchanged reading in the consumer-price index matched the median estimate of 83 economists surveyed by Bloomberg and followed a 0.3 percent drop the prior month, Labor Department data showed. Costs rose 1.7 percent in 2012, down from a 3 percent increase in 2011. Consumer prices rose 2.4 percent on average annually over the past decade.

Price increases will probably remain restrained as retailers including Target Corp. use discounts to attract customers and budget battles in Washington hurt confidence. Federal Reserve policy makers are likely to maintain unprecedented easing measures while inflation holds below their target level and absent further progress on reducing joblessness.

“There’s nothing to worry about on the inflation front” so the Fed will continue easing measures, said Bricklin Dwyer, an economist at BNP Paribas in New York, who correctly projected the December price reading.

Price Measure

The Fed’s preferred price measure, which is tied to consumer spending patterns, rose 1.4 percent in the 12 months to November, according to data from the Commerce Department.

Central bankers in December adopted a more flexible approach to their interest-rate outlook, saying borrowing costs will stay low “at least as long” as unemployment remains above 6.5 percent and if the Fed predicts inflation of no more than 2.5 percent one or two years in the future. That language replaced an earlier link between the rate outlook and calendar dates. Unemployment was 7.8 percent in December and November.

The consumer-price report showed energy costs decreased 1.2 percent in December as gasoline fell 2.3 percent.

Fuel costs so far this year have held near a 2012 low reached in December. A gallon of regular gasoline at the pump dropped to a $3.29 average on Jan. 15, close to the $3.22 reached on Dec. 19 that was the lowest in a year, according to AAA, the biggest U.S. auto group.

Lower fuel prices will help Americans’ buying power even as higher taxes restrain their discretionary spending. The fiscal pact passed by Congress on Jan. 1 allowed the payroll tax used to pay for Social Security benefits to return to the 2010 level of 6.2 percent from 4.2 percent. That reduces the paycheck by about $83 a month for someone who earns $50,000.

A separate report from the Labor Department today showed wages adjusted for inflation climbed 0.3 percent on average in December after increasing 0.6 percent the prior month. For all of 2012, they were up 0.3 percent after falling 1 percent the prior year.

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