Manufacturing Picks Up Heading Into U.S. Budget Cuts

Manufacturers boosted production in February heading into U.S. budget cuts and political squabbles this month that hurt consumer sentiment, reports today showed.

Output at factories, mines and utilities climbed 0.7 percent, the most in three months, exceeding the median projection in a Bloomberg survey, according to data from the Federal Reserve in Washington. The Thomson Reuters/University of Michigan preliminary sentiment index for March unexpectedly fell to 71.8, the lowest level since December 2011.

“Manufacturing has been leading the recovery,” said Gus Faucher, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, whose firm is the second-best forecaster of industrial production for the past two years, according to data compiled by Bloomberg. “That’s good news for the labor market, it’s good news for wages, it’s good news for consumer spending” because manufacturers pay above-average wages, said Faucher, who also correctly projected last month’s gain in production.

Business investment and lean inventories are spurring gains in output at companies such as Texas Instruments Inc. that will help propel growth. The pickup may enable the world’s largest economy to cope with across-the-board federal spending cuts, a payroll-tax increase and higher gasoline prices that are shaking household confidence.

Shares Drop

Stocks fell, sending the Dow Jones Industrial Average lower for the first time in 11 days, on the unexpected slump in confidence. The benchmark gauge slid 25.03 points, or 0.2 percent, to 14,514.11 at the close in New York.

Another report today showed factories in the New York region expanded for a second month in March, indicating the gains are being sustained. The Federal Reserve Bank of New York’s so-called Empire State index eased to 9.2 this month from 10 in February. Readings greater than zero signal expansion in New York, northern New Jersey and southern Connecticut.

Economists forecast industrial production would climb by 0.4 percent in February, according to the median estimate of 83 projections in a Bloomberg. Utility output rose in February, while mining decreased for a third straight month.

Within manufacturing, which accounts for about 12 percent of the economy, output increased 0.8 percent following a 0.3 percent decrease in January. Factory production jumped by 1.3 percent in December and 1.7 percent the previous month.

The breakdown showed a 2.5 percent gain in production of business equipment, the biggest advance in three months. Output of construction materials and business supplies also increased in February.

Looking ‘Good’

“It looks like a pretty good quarter for manufacturing,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, who correctly projected the gain in production. “Capital goods are doing well, autos came back a little bit and there’s strength in consumer goods. It’s looked pretty broad-based.”

Texas Instruments, the largest maker of analog chips, earlier this month raised the lower end of its forecasts for first-quarter sales and profit.

“We’re building backlog for the first time in several quarters,” Ron Slaymaker, vice president at Dallas-based Texas Instruments, said on a March 7 conference call. “We have increased production starts this quarter to support the higher level of anticipated demand.”

The February output of motor vehicles and parts increased 3.6 percent after a 4.9 percent drop a month earlier, today’s Fed report also showed.

Auto Sales

General Motors Co. and Ford Motor Co. project automobile sales, on pace for the best year since 2007, will remain resilient. Cars and light trucks sold at a 15.3 million annual rate in February after 15.2 million a month earlier, according to data from Ward’s Automotive Group.

It cost Americans more to run those cars last month, another report showed. The consumer-price index advanced 0.7 percent in February, the first increase in four months and the biggest since June 2009, reflecting the biggest jump in gasoline prices in more than three years, according to data from the Labor Department.

The jump in fuel costs, combined with concern that $85 billion in federal budget cuts, or sequestration, that began this month will slow the economy and hiring, probably contributed to the slump in confidence last month. That tempered optimism created by record stock prices, gains in employment, and a housing rebound that have so far helped propel bigger-than-forecast gains in spending.

Retail Sales

Retail sales increased 1.1 percent in February, double the median forecast of economists surveyed by Bloomberg and the most in five months, Commerce Department figures showed this week.

The Michigan survey found 34 percent of consumers polled had heard negative news about the government in March, the highest share since monthly records began in 1978, Cooper Howes, a New York-based economist for Barclays Plc. said in research note.

“Nobody knows what impact fiscal tightening will have, but it seems quite scary,” Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors Inc. in White Plains, New York, said in a telephone interview from London. “This is consistent with a clear slowdown in spending, though not catastrophic.” Shepherdson projected the sentiment index would drop to 70, the lowest among economists surveyed by Bloomberg.

Increase Projected

The University of Michigan’s gauge was projected to increase to 78, according to the median estimate of those surveyed.

A better job outlook may help underpin spending even as confidence wanes. Payrolls rose by 236,000 workers in February and the number of people let go in January dropped to the lowest level in records going back 12 years, according to figures from the Labor Department. The jobless rate dropped to a four-year low of 7.7 percent last month from 7.9 percent.

Also, the housing market rebound is boosting consumers’ net worth. The S&P/Case-Shiller index of property values in 20 U.S. cities increased 6.8 percent in December from the same month in 2011, the biggest year-to-year gain since July 2006.

Nonetheless, consumers are contending with a higher payroll tax. The levy that funds Social Security reverted to its 2010 level of 6.2 percent from 4.2 percent as of January, and an American who earns $50,000 is taking home about $83 less a month as a result.

David C. Novak, chief executive officer of Louisville, Kentucky-based Yum! Brands Inc., which operates and franchises restaurants such as Taco Bell, KFC and Pizza Hut, said their research indicates consumers remain uneasy.

“Nobody is really taking a victory lap,” Novak said in a March 13 presentation. “People want to have confidence, but I don’t think they necessarily have it.”