Bloomberg News

U.S. Economy: Factories Lead Recovery as Jobs, Housing Flag

October 20, 2011

(Updates with closing market prices in sixth paragraph.)

Oct. 20 (Bloomberg) -- Manufacturing in the Philadelphia area unexpectedly expanded in October at the fastest pace in six months, signaling factories are helping support a U.S. economy weighed down by weakness in the housing and labor markets.

The Federal Reserve Bank of Philadelphia’s general economic index increased to 8.7 from minus 17.5 last month, the biggest one-month rebound in 31 years. Readings greater than zero indicate expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Companies such as hydraulic equipment-maker Parker Hannifin Corp. are raising sales forecasts as they benefit from rising business investment and overseas demand. Other reports today showed purchases of existing homes declined and Americans’ confidence in the economic outlook slumped with unemployment stuck near 9 percent and wages stagnant.

“Manufacturing continues to play a prominent role because of the exporters,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “There are orders there and the economy is improving. The problem we have is that we’re moving into an expansion phase at a pace that’s far below what an expansion usually is.”

The median forecast in a Bloomberg News survey of economists for the factory gauge was minus 9.4. Estimates from ranged from minus 16.5 to 1.

Shares Advance

Stocks climbed as European governments discussed deploying $1.3 trillion in funds to tame the sovereign debt crisis and France and Germany asked officials to agree on crisis plans by Oct. 26. The Standard & Poor’s 500 Index rose 0.5 percent to 1,215.39 at the 4 p.m. close in New York.

The Fed’s report showed the new orders measure climbed to the highest level since April after contracting the previous month. Shipments also expanded in October, while a gauge of factory employment in the region indicated slower job gains.

Individual measures in the index don’t contribute to the headline reading, so some economists consider it a gauge of sentiment among manufacturers.

Economists monitor Philadelphia and New York Fed factory reports for clues about the Institute for Supply Management national figures on manufacturing during the month. The ISM will release its report on Nov. 1.

Parker Hannifin this week increased its full-year forecast after posting higher sales and profit in the third quarter from a year earlier. In addition to a gain in North American industrial orders, stronger business in Europe helped ease the Cleveland-based company’s concerns the global economy might retrench, it said.

Europe’s Outlook

“If we haven’t talked ourselves into a double-dip by now, we probably won’t because we’ve been talking about it for a better part of two quarters here,” President and Chief Executive Officer Donald Washkewicz said in an Oct. 18 call with analysts, noting that Parker Hannifin’s outlook was “bullish.” “All of the major countries, being Germany, France, U.K., Italy, are all looking good. That’s the reason we’re pretty optimistic about Europe going forward.”

While manufacturing is holding up, housing continues to be buffeted by consumer pessimism and an absence of faster job growth.

Purchases of existing homes dropped 3 percent last month to a 4.91 million annual rate, according to figures from the National Association of Realtors. The median price declined 3.5 percent from a year ago, and about one in five real-estate agents polled said contracts had been canceled, the group said.

Sales to Inventories

Slower sales amid elevated foreclosures are keeping inventories high. At the current pace of purchases, it would take 8.5 months to sell the number of existing homes on the market, up from 8.4 months at the end of August.

Previously owned home sales declined in three of the four U.S. regions, led by an 8.8 percent drop in the West.

Scottsdale, Arizona-based Meritage Homes Corp., which builds energy-efficient single-family homes, saw its sales in the quarter ended in September rise from a year earlier even as demand remains at “depressed levels,” executive vice president Brent Anderson said on an Oct. 12 conference call.

“We need to have more people in jobs -- good, well-paying, full-time jobs,” Anderson said. “It’s really a matter of confidence.”

Sentiment dropped in October to the lowest level since the recession, a Bloomberg measure showed. The Bloomberg Consumer Comfort Index’s monthly expectations of the economy declined to minus 45, the worst reading since February 2009. The weekly comfort gauge was minus 48.4 for the period ended Oct. 16, up from minus 50.8 the prior week that was close to a record low.

Jobless Claims

Limited improvement in the labor market is souring sentiment. Jobless claims fell by 6,000 to 403,000 in the week ended Oct. 15, according to Labor Department data today.

“We’re running in place,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. The data are “consistent with lackluster to moderate growth in the job market and the economy,” he said.

The index of U.S. leading economic indicators increased in September at a pace that points to a slower rate of growth in the coming months. The Conference Board’s gauge of the outlook for the next three to six months climbed 0.2 percent after a 0.3 percent gain in August, the New York-based research group said today. Last month’s gain was the smallest since a decline in April.

--With assistance from Timothy Homan and Chris Middleton in Washington. Editors: Vince Golle, Carlos Torres

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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