Manufacturing begins to boost

The gain in production could indicate a stabilizing market

Bloomberg NewsJune 14, 2013 

— Manufacturers boosted production in May for the first time in three months, signaling the worst of the industrial slump is over.

Factory output climbed 0.1 percent after dropping 0.4 percent in April and 0.3 percent in March, according to Federal Reserve data issued Friday in Washington. Another report showed consumer sentiment declined this month from a six-year high.

American households are replacing aging automobiles as more jobs and rising home and stock prices underpin confidence, benefiting manufacturers such as General Motors. That means the projected slowing in economic growth this quarter caused by the across-the-board federal spending cuts and cooling global demand will probably give way to a pickup later this year.

“Manufacturing has had a little bit of a rough ride lately, but there is nothing to suggest that will continue,” said Drew Matus, deputy U.S. chief economist at UBS Securities in Stamford, Conn. “We may have to build up inventories a little, so that will be a net positive. Continued consumer demand will trump what is happening in the rest of the world.”

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 82.7 in June from 84.5 the prior month that was the highest since July 2007, a report Friday showed. “The stock market peaked in late May, so you may be seeing some of that being reflected in the number,” said Michael Feroli, chief U.S. economist at JPMorgan Chase in New York. “In general, the consumer is in a relatively good position.”

The Fed’s production report also showed output for all industries, including mines and utilities, was unchanged in May as a drop in energy use offset the gain in manufacturing. A report Thursday from the Commerce Department showed purchases at car dealerships climbed 1.8 percent in May, more than twice the 0.7 percent gain a month earlier. Cars and light trucks sold at a 15.2 million annualized rate in May, the sixth month out of the last seven to exceed the 15 million mark.

China’s slowdown and the European recession have kept pressure on global manufacturers including DuPont Co. and Dow Chemical Co.

“Customers are cautious and the signals continue to be mixed,” said Howard Ungerleider, an executive vice president at Dow, based in Midland, Mich.

“The good news is right here in the United States, where we do see improvements, although growth still remains at lower levels than we would like,” Ungerleider said at a June 12 conference. “Residential construction is up, but public budget tightening is limiting growth in the commercial sector. Our businesses last year really called for 2013 to be like 2012 and this is proving to be more right than wrong.”

The global growth slowdown has also been restraining inflation. Wholesale prices in the U.S. climbed in May for the first time in three months, reflecting an increase in fuel and food prices that failed to filter through to other goods, figures from the Labor Department also showed Friday.

The producer-price index rose 0.5 percent after falling 0.7 percent in April, which was the biggest drop in more than three years. Core wholesale inflation, which excludes often-volatile food and energy prices, increased 0.1 percent.

“There’s just a lack of any inflationary pressures across the economy,” said Stuart Hoffman, chief economist at PNC Financial Services Group, Inc. in Pittsburgh. “From the Fed’s point of view, I think that the fact that it’s a bit higher than expected doesn’t in any way change the view that inflation is still quite low, quite tame.”

Fed officials meeting Tuesday and Wednesday in Washington will weigh how much changes in inflation and the labor market will influence the pace of their $85 billion in monthly asset purchases.

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