Broad Gain in Factory Production Signals Strength: Economy

Factories in July were the busiest in five months as cars rolled off U.S. assembly lines at the fastest rate in 14 years and a stronger economy encouraged American companies to invest in equipment.

The 1 percent gain at manufacturers followed a 0.3 percent increase in the prior month that was bigger than initially estimated, the Federal Reserve said today in Washington. Total industrial production, which also includes mines and utilities, advanced 0.4 percent for a second month. Another report showed a record cross-border investment outflow from the U.S. in June as foreign investors reduced their holdings of government debt.

Production lines shifted into higher gear as Americans replaced aging autos and bought furniture and appliances. Output of business equipment such as transportation goods and machinery advanced the most in five months, highlighting a broad-based manufacturing gain that will keep driving economic growth.

“The manufacturing sector at this point appears to be firing on all cylinders and, if anything, that’s an indication that momentum in the U.S. economy is picking up,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York, who correctly projected the industrial output gain. “We’ve seen it in machinery and computers, and also in motor vehicle production.”

Automobile assemblies jumped to a 13.2 million annualized rate in July, the fastest pace since May 2000, the Fed’s data showed. A 10.1 percent increase in car and parts production was the biggest since July 2009 as robust demand prompted automakers to reduce the number of idle days typically used to retool for the new model year.

Consumer Goods

The acceleration in July factory production extended beyond autos. The manufacture of business equipment jumped 1.3 percent, the most since February. Factories were also churning out more consumer goods. In addition to motor vehicles, the output of appliances, furniture and home electronics picked up.

Another report today showed a risk household demand will cool. Consumer confidence unexpectedly declined in August to a nine-month low, depressed by gloomy wage perceptions. The Thomson Reuters/University of Michigan preliminary sentiment index dropped to 79.2 from 81.8 in July.

The retreat in confidence was paced by mounting concern about the economic outlook as households said earnings would probably not climb as fast as prices. That bolsters Federal Reserve Chair Janet Yellen’s argument that pockets of labor-market weakness remain.

Household Incomes

“The median household doesn’t think it will be able to beat inflation over the next year,” said Dana Saporta, director of U.S. economic research at Credit Suisse in New York, who projected sentiment would drop. “Chair Yellen specifically cited pessimism over household income as one of the headwinds that’s impacting the U.S. economy right now, and these figures would seem to underscore her point.”

Manufacturing, which makes up 75 percent of total production, was forecast to increase 0.4 percent, according to the Bloomberg survey median. All industrial output was projected to rise 0.3 percent, according to the median forecast of 82 economists. Estimates ranged from a drop of 0.4 percent to an increase of 0.7 percent after a previously reported June gain of 0.2 percent.

Stocks erased losses, led by a rally in energy producers, as violence in Ukraine boosted oil prices. The Standard & Poor’s 500 Index ended the day little changed at 1,955.06 as of 4 p.m. in New York.

Net Outflows

Speculation that a stronger U.S. economy and improving labor market will prompt the Fed to raise interest rates sooner than forecast may help explain why investors abroad reduced their holdings of U.S. government bonds and notes in June.

The Treasury Department said today that total net outflow of long-term U.S. securities and short-term funds such as bank transfers reached an all-time high of $153.5 billion after an inflow of $33.1 billion the previous month. The June figure, and $40.8 billion in net selling of Treasury bonds and notes by private investors, were the largest ever, the department said.

Another report today from the Labor Department showed wholesale prices rose at a slower pace in July as fuel costs dropped by the most in eight months.

Today’s Fed data showed total industrial production was held back by a 3.4 percent drop in utility output as cooler conditions reduced demand for air conditioning.

The average temperature in contiguous U.S. last month was 73.3 degrees Fahrenheit (22.9 Celcius), making it the mildest July since 2009, according to data from the National Oceanic and Atmospheric Administration.

Mining production, which includes oil drilling, increased 0.3 percent after a 1.3 percent gain.

ISM Data

Other data on manufacturing, which accounts for about 12 percent of the economy, show sustained progress. The Institute for Supply Management’s factory index was 57.1 last month, the highest reading since April 2011, the Tempe, Arizona-based group reported Aug. 1. Readings above 50 signal expansion.

Cars and light trucks sold at a 16.4 million annualized pace in July after a 16.9 million pace in June that was the strongest since July 2006, according to data from Ward’s Automotive Group.

“Looking ahead, manufacturing activity remains solid,” Emily Kolinski Morris, senior U.S. economist at Ford Motor Co., said on an Aug. 1 sales call. “The good macroeconomic fundamentals observed since the weak first quarter including robust manufacturing activity, improving labor market conditions, and continued supportive monetary policy have all contributed to this improving trend.”

Applied Materials Inc., the largest maker of semiconductor-manufacturing equipment, said yesterday that orders in the third quarter climbed 24 percent from the same three months last year. The Santa Clara, California-based company also forecast fourth-quarter sales that may top estimates as demand rises for machines that make displays.

Before it's here, it's on the Bloomberg Terminal.