Production Falls as U.S. Feels Global Weakness: EconomyShobhana Chandra
Industrial production declined in April by the most in eight months, indicating American manufacturers will provide little support for an economy beset by weaker global markets and federal budget cuts.
The larger-than-forecast 0.5 percent decrease in output at factories, mines and utilities followed a revised 0.3 percent gain that was weaker than first reported, Federal Reserve figures showed today in Washington. An increase in homebuilder optimism indicated housing remains the economy’s bright spot.
A European recession that extended to a record sixth quarter and slower growth in China are curbing sales for U.S. companies such as Deere & Co. A second straight decrease in factory production combined with limited inflation show Fed policy makers have room to maintain record monetary stimulus as they try to bolster the expansion.
“The economy is just not picking up steam,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, who projected a 0.4 percent drop in industrial production. “The weakness in the rest of the world doesn’t help. The Fed will keep trying to prime the pump.”
Stocks rose, sending the Standard & Poor’s 500 Index to another record, as the production figures fueled bets the Fed will be in no rush to scale back stimulus. The S&P 500 climbed 0.5 percent to 1,658.78 at the close in New York.
The euro-area economy shrank more than forecast in the three months through March, extending a recession that began at the end of 2011. Gross domestic product in the 17-nation euro zone fell 0.2 percent after a 0.6 percent decline in the previous quarter, the European Union’s statistics office in Luxembourg said today.
Deere cut its global construction and forestry equipment sales forecast to a decline of about 5 percent in the year through October, compared with a previous projection for a 3 percent increase.
The world’s largest agricultural-equipment maker reduced its full-year equipment sales forecast after cold, wet weather slowed demand for construction and turf-care machinery in North America.
The Moline, Illinois-based company’s “near-term forecast is being tempered by lingering economic concerns in many parts of the world, which are restraining business confidence and growth,” Chairman and Chief Executive Officer Samuel Allen said in a statement today. North America is Deere’s largest market.
Manufacturing, which makes up 75 percent of total production, unexpectedly fell 0.4 percent, the third drop in four months, the Fed’s report showed. Economists projected a 0.1 percent April gain in manufacturing, which accounts for about 12 percent of the economy.
The decrease followed a 0.3 percent drop a month earlier, the first back-to-back decline since June 2009, when the economy was emerging from a recession.
The median forecast for total industrial production in the Bloomberg survey was for a 0.2 percent decrease. Estimates of the 85 economists surveyed ranged from a drop of 0.7 percent to an increase of 0.3 percent. The prior month was previously reported as a gain of 0.4 percent.
A regional report from the Federal Reserve Bank of New York indicated today that the weakness in manufacturing extended into May. A gauge of factories in the New York area fell to minus 1.4 this month from 3.1 in April. Readings less than zero signal contraction in New York, northern New Jersey and southern Connecticut.
Today’s nationwide industrial production data showed broad-based weakness. Output declined for business equipment, consumer goods and construction materials.
The output of motor vehicles and parts decreased 1.3 percent after a 2.3 percent gain a month earlier. Manufacturing excluding autos and parts fell 0.3 percent after a 0.5 percent drop.
Cars and light trucks sold at a 14.9 million annual pace in April, down from a 15.2 million rate the prior month, according to industry data from Ward’s Automotive Group. The first-quarter average was 15.3 million, the strongest since 2008 and a sign the longer-term outlook remains positive.
Today’s Fed report also showed utility output slumped 3.7 percent after a 6.4 percent jump the previous month that was the biggest in six years. Demand for electricity and natural gas returned to normal after gaining during the coolest March since 2002, according to the National Climatic Data Center.
Limited inflation is allowing Fed policy makers to continue with $85 billion a month in securities purchases that are helping fuel housing demand.
A report from the Labor Department today showed wholesale prices slumped in April by the most in three years, reflecting a drop in fuel costs. The producer-price index declined 0.7 percent, the biggest decrease since February 2010, after falling 0.6 percent in March.
The economy may cool to a 1.6 percent pace in the second quarter, after growing at a 2.5 percent rate in the first three months of 2013, according to a Bloomberg survey of economists from May 3 to May 8. The projected slowdown reflects the lagged effect from a two percentage-point rise in the payroll tax at the start of 2013 and $85 billion in automatic budget cuts that began on March 1.
Companies are paring inventories at the same time, setting the stage for a rebound in industrial production in the second half of the year. Business inventories were little changed in March for a second month, as sales fell by the most since June, Commerce Department figures showed on May 13.
Greenbrier Cos., a Lake Oswego, Oregon-based rail-car maker, is among those that expect orders will grow as consumer demand picks up and the industry works off the excess supply built up in the past few years.
“We think there will be a modest amount of demand continuing in 2013,” Chief Executive Officer William Furman said in a May 8 presentation to investors. “We see substantial demand in 2014 and 2015 building up.”
Another report today showed housing remains a pillar of the expansion as low mortgage rates, a strengthening job market and limited inventories benefit builders.
The National Association of Home Builders/Wells Fargo index of builder confidence rose to 44 from a revised 41 in April, the Washington-based group reported. Readings below 50 mean more respondents said conditions were poor.
“Builders are noting an increased sense of urgency among potential buyers as a result of thinning inventories of homes for sale, continuing affordable mortgage rates and strengthening local economies,” said Rick Judson, chairman of the trade group and a builder from Charlotte, North Carolina. “This is definitely an encouraging sign.”