Bloomberg News

U.S. Economy: Production Picks Up While Inflation Cools

November 17, 2011

(Updates with closing markets in fifth paragraph.)

Nov. 16 (Bloomberg) -- Industrial production in the U.S. advanced more than forecast in October, adding to evidence the world’s largest economy is weathering disruptions in financial markets caused by the crisis in Europe.

Output at factories, mines and utilities climbed 0.7 percent after a revised 0.1 percent drop in September, figures from the Federal Reserve showed today. Other reports showed the cost of living unexpectedly fell and builder sentiment improved.

Combined with rising retail sales and record exports, the data signal manufacturing will help the economic recovery strengthen heading into 2012, overcoming concern surrounding a default in Europe that has caused stocks to plunge. Less inflation also opens the door for Fed policy makers to take additional action should the expansion falter.

“We’re likely to continue gradually working through all these imbalances, with the economy improving,” said Richard DeKaser, deputy chief economist at Parthenon Group Inc. in Boston, who correctly forecast the gain in production. “People should not be concerned about inflation at this point. The Fed has free reign to ease monetary policy if it chooses.”

Stocks slid as Fitch Ratings said further contagion from Europe’s debt crisis would pose a risk to American banks. The euro weakened, while oil climbed to a five-month high above $102 a barrel. The Standard & Poor’s 500 Index dropped 1.7 percent to 1,236.91 at the close in New York.

The median forecast of 83 economists surveyed by Bloomberg News called for a 0.4 percent gain in production. Estimates ranged from increases of 0.1 percent to 0.8 percent.

Less Inflation

The cost of living dropped in October for the first time in four months, data from the Labor Department showed. The consumer-price index declined 0.1 percent from the prior month after a 0.3 percent rise in September. The so-called core rate that excludes volatile food and fuel costs rose 0.1 percent, matching September as the smallest gain this year.

Over the past 12 months prices climbed 3.5 percent, the smallest year-over-year gain since April.

“The inflation outlook is pretty benign,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who correctly projected the CPI decline. “The fact that recent higher readings are moderating certainly speaks well to the Fed’s accommodative policy.”

Also today, National Association of Home Builders/Wells Fargo index of builder confidence rose to 20 in November, the highest level since May 2010, the Washington-based group said. Readings lower than 50 mean more respondents said conditions were poor.

Housing Outlook

Borrowing costs near a record low and efforts by the Fed to spur demand may be starting to bear fruit. At the same time, the prospect of more foreclosed properties returning to the market and competing with new construction means a sustained rebound in housing may be years away.

“Well-qualified buyers in select areas are being tempted back into the market by today’s extremely favorable mortgage rates and prices,” NAHB Chief Economist David Crowe said in a statement. “We are anticipating further, gradual gains.”

The production data showed factory output, which makes up 75 percent of the total, increased 0.5 percent, the most in three months. Manufacturing accounts for about 12 percent of the U.S. economy.

The gain was paced by automakers and producers of business equipment. The latter indicates investment in computers and communications gear will continue to bolster the expansion. In the third quarter, corporate spending on equipment and software climbed at a 17.4 percent pace, the most in a year, adding 1.2 percentage points to economic growth.

Spending Grows

Stronger consumer spending could propel U.S. manufacturing further. Retail sales rose more than projected in October as Americans bought more electronics and demand for automobiles improved, Commerce Department figures showed yesterday. A month earlier, businesses had enough goods on hand to last 1.27 months at the current sales pace, near a record low, which may lead to more factory orders should demand persist.

Increased foreign demand for U.S.-made goods has also kept assembly lines running as a cheaper dollar makes American goods more competitive overseas. IntercontinentalExchange Inc.’s Dollar Index, which tracks the currency against those of six major trading partners including the euro, yen and pound, has dropped 12 percent from June 7, 2010, through yesterday. Exports rose to a record $180 billion in September, government data showed last week.

‘Great Start’

“We’re off to a great, great start,” Lee Banks, executive vice president at Parker Hannifin Corp., said during a Nov. 9 investor conference. “I just got back this week from spending time through Eastern Europe and every time you think things are stagnating you get out in the market and you look at the opportunities around the world for people that want to live like we live here, you see nothing but great opportunities.”

Parker Hannifin last month lifted its fiscal 2012 outlook. North American demand will also support the Cleveland-based maker of hydraulic equipment, according to Ann Duignan, an analyst at JPMorgan Chase & Co. Projections for revenue growth in that region next year increased to about 8.3 percent from about 6.2 percent as orders “re-accelerated,” Duignan told Bloomberg News.

--With assistance from Timothy R Homan, Bob Willis, Shobhana Chandra and Chris Middleton in Washington. Editors: Carlos Torres, Vince Golle

Company News: PH US <Equity> CN

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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