Production Unexpectedly Decreases as U.S. Factories Cool

Industrial production in the U.S. unexpectedly shrank in January as factories took a breather after the biggest back-to-back gain in three decades.

Output at factories, mines and utilities fell 0.1 percent after a 0.4 percent gain in December, figures from the Federal Reserve showed today in Washington. The median estimate in a Bloomberg survey called for a 0.2 percent rise. Manufacturing, which makes up 75 percent of total production, dropped after revised data for November and December showed the biggest two-month advance since 1984.

A pickup in consumer and business spending toward the end of 2012 and stabilization in overseas markets including China and Europe will help sales at companies such as Deere & Co. and Eaton Corp Plc. At the same time, a higher tax that is trimming Americans’ paychecks and the risk of across-the-board cuts in federal outlays may prevent bigger gains in production.

“January showed a bit of a payback after the strength in manufacturing toward the end of 2012,” said Sam Coffin, an economist at UBS Securities LLC in Stamford, Connecticut, who projected a 0.3 percent drop in factory output. “Manufacturing will be growing pretty rapidly as companies have to restock inventories, and there’s overseas as well as domestic demand. We’re on a slightly better path now.”

New York

Another report today showed factories regained their footing this month. The Federal Reserve Bank of New York’s general economic index climbed to 10, the highest since May 2012 and exceeding the highest forecast in a Bloomberg survey, from minus 7.8 in January. The median projection called for minus 2. Readings greater than zero signal expansion in New York, northern New Jersey and southern Connecticut.

Stocks were little changed after the reports. The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,521.59 at 9:49 a.m. in New York.

Estimates for total U.S. production from the 81 economists surveyed by Bloomberg ranged from a drop of 0.2 percent to an increase of 0.5 percent. The prior month was previously reported as a gain of 0.3 percent.

Manufacturing, which accounts for about 12 percent of the economy, dropped 0.4 percent last month after jumping 1.1 percent in December and 1.7 percent in November, the biggest back-to-back gain since January and February 1984.

Auto Production

The output of motor vehicles and parts decreased 3.2 percent after a 2.9 percent gain a month earlier, today’s report showed. Excluding autos and parts, manufacturing production fell 0.1 percent after jumping 0.9 percent and 1.3 percent in the previous two months.

Automobiles are likely to be a source of strength this year, according to other reports. Cars and light trucks sold at a 15.2 million annual rate in January after 15.3 million in December, data from Ward’s Automotive Group showed. Including November’s 15.5 million rate, auto sales over the past three months have been the strongest in five years.

Today’s Fed report also showed that capacity utilization, which measures the amount of a plant that is in use, declined to 79.1 percent from a four-year high of 79.3 percent in December.

Utility output rebounded 3.5 percent after falling 4.5 percent the prior month. The figures probably reflected a return to more normal weather after an unseasonably warm December had led to a decline in utility production.

Mining Output

Mining production, which includes oil drilling, decreased 1 percent after being little changed the prior month.

The breakdown of the manufacturing figures showed a mixed reading last month with computers and metals in addition to autos showing declines, while machinery, furniture and clothing advanced.

Deere, the largest agricultural equipment maker, raised its full-year profit forecast and posted quarterly earnings that topped analysts’ estimates. First-quarter revenue from machinery gained 18 percent in the U.S. and Canada and 2 percent in the rest of the world, the Moline, Illinois-based company said.

“John Deere has entered 2013 on a strong pace,” Susan Karlix, manager of investor communications, said on a Feb. 13 conference call with analysts. “Our key markets remain in good shape, for the most part, and we’re looking for another solid year. True, our near-term outlook is tempered by uncertainties over fiscal, economic and trade issues. This is hurting business confidence and restraining growth.”

Overseas Demand

Eaton, an industrial equipment manufacturer, also is poised to gain from improving demand. China’s economy is accelerating while in the U.S., housing and non-residential construction will help drive economic growth, Chairman and Chief Executive Officer Sandy Cutler said in an interview following Eaton’s quarterly earnings report on Feb. 4.

President Barack Obama, in his State of the Union address this week, unveiled proposals to revive manufacturing and create jobs, as falling energy prices in the nation and rising labor costs in China make U.S. producers more competitive. His ideas included efforts to bolster clean energy subsidies, hire hundreds of people to lobby foreign companies to open U.S. plants, end tax breaks to firms that ship jobs overseas, and expand free-trade pacts.

Some recent reports show an improving outlook. The Institute for Supply Management’s factory gauge advanced to a nine-month high of 53.1 in January, exceeding the highest estimate in a Bloomberg survey of economists.

Growth in jobs and incomes may help cushion the hit to consumer spending from the higher payroll levy used to pay for Social Security benefits. Starting January, that tax rate returned to the 2010 level of 6.2 percent, from 4.2 percent.

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