Surprise U.S. factory drop highlights outlook risk

Industrial production in the U.S. unexpectedly fell in August by the most since March 2009, highlighting risks to the economic outlook a day after the Federal Reserve boosted record stimulus.

The 1.2% decrease at factories, mines and utilities followed a revised 0.5% gain in the prior month, figures from the Fed showed today (Sept. 14). The median estimate in a Bloomberg survey of 81 economists called for no change.

Another report showed purchases cooled at retailers excluding auto dealers and gasoline service stations.

A global economic slowdown is restraining demand for U.S. exports, making it harder for companies like Texas Instruments Inc. and Dow Chemical Co. to expand sales. Manufacturers are also challenged by the prospect of budget cuts and tax increases set to take effect at the end of the year and consumer spending that’s hampered by 8% unemployment.

“Manufacturing is losing momentum,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “Exports will weaken further, and the consumer is in a very tough position. The economy isn’t going anywhere.”

Demand for riskier assets after yesterday’s announcement that the Fed would buy mortgage securities sparked a global rally in stocks and commodities.

CONSUMER CONFIDENCE
Another report today showed confidence among U.S. consumers unexpectedly improved in September, boosted by gains in stock prices and home values.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment climbed to 79.2 from 74.3 the prior month. The gauge was projected to fall to 74, according to the median forecast of 71 economists surveyed by Bloomberg News.

Retail sales minus autos and gasoline increased 0.1% in August, less than forecast, after a 0.8% gain in July, the Commerce Department said today in Washington. Overall purchases increased 0.8% after a 0.6% advance.

Higher food and fuel costs along with smaller gains in payrolls and wages may take a toll on household finances, posing a challenge for merchants such as Kohl’s Corp. and Macy’s Inc.

HIGHER PRICES
Gasoline prices are taking a toll. Regular-grade gas prices have climbed to an average of $3.87 per gallon, up 54 cents since the start of July, according to AAA, the nation’s largest motoring organization.

The increase accounted for 80% of a 0.6% in consumer prices in August, the Labor Department said today. The gain in the measure of the cost of living was the biggest in more than three years.

“Gas prices make a big difference,” said Terence Thompson, a landscaper from Mechanicsville, Md. “The cost of food has gone up, clothes – I have adjusted a lot. I have to watch what I buy.”

Household purchases, which account for about 70% of the economy, rose at a 1.7% annual rate from April through June, the weakest since the third quarter of 2011, Commerce Department data show.

The figures, along with a slower global economy, help explain why manufacturers are pulling back.

MANUFACTURING DIP
Manufacturing, which accounts for about 12% of the economy, fell 0.7% in August, the biggest decrease in five months, the Fed’s data showed.

“Manufacturing is clearly decelerating,” said Guy Berger, a U.S. economist at RBS Securities Inc. in Stamford, Conn., who predicted a decline. “There is weakness all around in today’s numbers. Manufacturing’s contribution to the economy is coming down.”

The production of motor vehicles and parts fell 4%, the most in more than a year, after increasing 2.7% the month earlier, today’s report showed. Excluding autos and parts, manufacturing dropped 0.4% after a 0.2% gain in July.

Dow Chemical, the biggest U.S. chemical maker, this month announced a new global business structure as it seeks to reduce costs and respond to softening global demand.

“Industries and sectors worldwide are really in the midst of what we consider an incredible challenging environment,” Andrew Liveris, CEO of the Midland, Mich.-based company, told investors at a Sept. 11 conference.

The same day, Dallas-based Texas Instruments, the largest maker of analog chips, said demand in all segments except for wireless is tracking below expectations this quarter.

“Almost all of them are running a little weaker than what we had expected back in July,” Texas Instruments Vice President Ron Slaymaker said in a Sept. 11 teleconference with analysts. “We’re just operating in a weaker demand environment.”

Utility output plunged 3.6%, after a 1.3% gain the prior month. The figures may reflect some easing after the surge in July, which was the hottest month in the lower 48 states in records going back to 1895, according to the National Oceanic and Atmospheric Administration.

Mining output, which includes oil drilling, decreased 1.8%.

AUTO BOOST?
The latest results on car purchases have been more encouraging. Autos, a source of manufacturing strength, sold at a 14.46 million annual rate last month, the fastest since the surge in August 2009 tied to the government’s “cash-for- clunkers” program. They were up from a 14.05 million pace in July, according to data from Ward’s Automotive Group.

The Fed yesterday announced its third round of large-scale asset purchases since 2008. Chairman Ben Bernanke for the first time pledged that the Federal Reserve will buy bonds until the economy gets closer to his goals, signaling the battle against unemployment eclipses any concerns about inflation for now.

A stagnant labor market may restrain household spending. Employers added 96,000 workers in August after a 141,000 increase in July. Unemployment, which fell to 8.1% as more Americans left the labor force, has exceeded 8% since February 2009, the longest stretch in monthly records going back to 1948.