Industrial Output in U.S. Rises by Most in Four Monts

Assembly lines in the U.S. churned out more automobiles and computers in June, pointing to a rebound in manufacturing that will help the world’s largest economy strengthen in the second half of 2013.

Output at factories, mines and utilities climbed 0.3 percent, the biggest advance since February, after being little changed in May, according to Federal Reserve data issued today in Washington. Another report showed homebuilders this month were the most confident in seven years.

Lean inventories and improving car sales are helping overcome softer overseas markets and the effects of broad federal budget cuts and higher taxes. Other government figures today signaled inflation picked up in June toward the Federal Reserve’s goal, giving policy makers room to trim record stimulus later this year.

“Housing is definitely moving forward, manufacturing is picking up a little more momentum, and we’re not on a path of deflation,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, the second-best production forecaster over the past two years, according to data compiled by Bloomberg. “I see this as a sign of some strength as we ended the second quarter. All of this feeds into thinking that the Fed will start to taper.”

Stocks fell, halting the longest rally in the Standard & Poor’s 500 Index since January, as Coca-Cola Co.’s profit dropped and a Fed official called for cuts to stimulus. The Standard & Poor’s 500 Index dropped 0.4 percent to 1,676.26 at the close in New York.

Survey Results

The gain in production matched the median forecast of 86 economists surveyed by Bloomberg. Estimates ranged from drop of 0.2 percent to a 0.7 percent increase.

Homebuilder confidence rose in July to the highest level since January 2006 as companies grew more upbeat about sales prospects, according to figures from the National Association of Home Builders/Wells Fargo. The group’s sentiment index climbed to 57 from 51 in June. The reading surpassed all but one forecast in a Bloomberg survey of 49 economists. The gauge has climbed 13 points in two months, the biggest back-to-back advance since January-February 1992.

“You’re seeing a significant pickup in demand for new residential dwellings,” said Brian Jones, senior U.S. economist at Societe Generale in New York. His forecast of 55 was the most accurate in the Bloomberg survey. “Mortgage rates are moving higher and pulling people in. And I think that in general, the economy is getting better.”

Prices Rise

The cost of living rose in June by the most in four months as gasoline prices climbed, figures from the Labor Department also showed today. The consumer-price index increased 0.5 percent after a 0.1 percent gain in May. The median forecast in a Bloomberg survey called for a 0.3 percent rise.

Excluding food and energy, prices climbed 0.2 percent for a second month.

Some Fed policy makers, including St. Louis Fed President James Bullard, have expressed concern inflation is too low, raising the risk of an outright decline in prices that would sap the recovery. Price readings closer to the Fed’s goal will give the central bank the flexibility to move forward later this year with reductions in its $85 billion in monthly asset purchases designed to stoke the economy.

Fed Bank of Kansas City President Esther George today said the U.S. was on the “right path” for economic recovery and that cuts in the pace of stimulus are “appropriate.” George, speaking on Fox Business Network, also said inflation appears to be “moderate” and the benchmark interest rate should not be held too low for too long.

Prices Climb

Consumer prices increased 1.8 percent in the 12 months through June, more than projected and up from a 1.4 percent year-over-year gain the prior month, the Labor Department’s report showed.

“A little more inflation, from the Fed’s point of view and the economy’s point of view, is actually desirable as long as it doesn’t go too far,” said PNC’s Hoffman. “It’s sort of a welcome note that we’re not headed down a path to deflation.”

Manufacturing production, which accounts for about 75 percent of total output, increased 0.3 percent in June, the most in four months, today’s Fed data showed. It followed a 0.2 percent gain in May that was larger than previously estimated. Economists projected a 0.2 percent increase for June, according to the Bloomberg survey median.

Production among technology industries, including computers and semiconductors, increased 1.2 percent in June after advancing 2.3 percent in each of the prior two months.

Capital Spending

The gains indicate American companies are beginning to boost capital investments as they look past the specter of sequestration and global growth risks. Spending on information technology is up 4 percent this year compared with 2 percent last year, according to the median in a survey of 203 businesses by Computer Economics, a research company in Irvine, California -- helping businesses such as Microsoft Corp.

Applied Materials Inc., the largest seller of machinery used in the production of semiconductors and flat-screen displays, expects industry spending to pick up next year as chipmakers boost output to meet demand for mobile-device parts.

Competition among smartphone providers is driving demand for more advanced parts and improvement in the machines that make them, Chief Executive Officer Mike Splinter said at a July 8 analyst briefing in San Francisco.

The Fed’s report today also showed motor vehicle production rose 1.3 percent in June following a 0.5 percent increase the month before.

Auto Sales

The automobile industry has been a bright spot for the economy, with the vehicle sales rate surging to 15.9 million in June, its best monthly pace since November 2007, according to data from Ward’s Automotive Group.

The industry is not doing as well overseas. Car sales in Europe slumped to a two-decade low in June, the European Automobile Manufacturers’ Association said today. Combined with other data showing German investor confidence unexpectedly dropped in July and euro-area exports fell in May for a second month, the figures added to signs the region is struggling to emerge from recession.

Slower-growing foreign markets may still temporarily crimp export-related activity at U.S. factories. The International Monetary Fund projects China’s growth will be 7.8 percent in 2013, down from an 8 percent April forecast, and the 17-country euro area will shrink 0.6 percent as the economies of France, Italy and Spain contract.

Export Markets

Alcoa Inc., the largest U.S. aluminum producer, reported second-quarter adjusted earnings that beat analysts’ estimates after a better-than-expected performance at its unit that supplies components to aerospace and power companies.

The New York-based company expects “continued pressure on prices and demand in North American industrial products and European industrial products,” while auto demand is expected to remain strong, Chief Financial Officer William Oplinger said in a July 8 conference call. “The economy in general is recovering slowly, with different speeds in Europe as well as in the U.S.”

A regional report yesterday showed manufacturing in the U.S. extended gains into July. The Federal Reserve Bank of New York’s general economic index climbed to 9.5, the highest since February, from 7.8 in June. Readings greater than zero signal expansion in the index, which covers New York, northern New Jersey and southern Connecticut.

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