Snowstorms curb industrial output, rebound seen

A VDOT (Virginia Department of Transportation) snow plow clears snow after a heavy snowstorm in Great Falls, Virginia February 6, 2010.

WASHINGTON (Reuters) - U.S. industrial production braked sharply in February, held back by severe winter storms that slammed parts of the country, while manufacturing activity in New York state stalled this month.

Analysts said Monday's data did not alter their views that the factory-led economic recovery remained on track, given weather disruptions and the fact details of the reports showed underlying strength. They expect a rebound in industrial production in March.

The reports came ahead of a Federal Reserve meeting on interest rates on Tuesday. The U.S. central bank is expected to hold overnight interest rates in a range of zero to 0.25 percent and maintain a pledge to keep them ultra-low for an "extended period" to nurture the recovery.

While U.S. manufacturing output fell in February, it rose outside of the auto sector, and mining activity posted a strong gain, leading overall industrial output to rise slightly. In addition, factory employment, shipments and unfilled orders in New York state all rose this month.

"The two reports were positive for the economy and they do indicate that the factory sector will make a positive contribution to growth in the first quarter," said Kenneth Kim, an economist at Stone & McCarthy Research Associates in Princeton, New Jersey.

The Federal Reserve said industrial output edged up 0.1 percent last month after increasing 0.9 percent in January, in line with market expectations. They blamed the slowdown on inclement weather. The report also showed the amount of the nation's industrial capacity in use hit the highest level in more than a year.

Although February's snowstorms affected industrial output, they had a minimal effect on activities like retail sales as people whose shopping had been impacted or delayed headed to the malls after the blizzards.

Separately, the New York Fed said its March gauge of manufacturing activity in New York state slipped to 22.86 from 24.91 in February. Markets had expected the measure to fall to 22.00.

Lingering worries over possible monetary tightening in China that could hamper the global economic recovery overshadowed the positive aspects of the reports, leaving U.S. stock indexes mixed at close. U.S. government bond prices were flat, while the dollar rose against a basket of currencies.

Manufacturing has led the economy out of the most severe downturn since the 1930s. But there are indications that consumers -- the main engine of the economy -- are starting to participate in the recovery as the labor market improves.

Still, major headwinds remain that could frustrate the recovery. Home builders sentiment fell unexpectedly this month, hit by lack of credit for new projects and a flood of foreclosed properties, the National Association of Home Builders said.

EMPLOYMENT MEASURE SOARS

While manufacturing activity in New York state slowed this month, the report's employment index rose to its highest level since October 2007 and the inventories measure jumped above zero for the first time in more than a year.

Even more heartening, new orders and shipments soared from the prior month, while the average workweek lengthened markedly and the backlog of orders grew.

"You're seeing a clear evidence of a V-shaped recovery in the manufacturing sector, partly because it shrank so rapidly during the recession but also, there's a lot of positive fundamentals," said Zach Pandl, an economist at Nomura Securities International in New York.

In addition to inclement weather, industrial production last month was curbed by a steep drop in motor vehicle output -- likely a reflection of the auto recalls by Toyota Motor Corp that depressed demand for cars. Manufacturing dipped 0.2 percent after growing 0.9 percent in January.

Stripping out vehicle assembly, manufacturing rose 0.1 percent.

"We believe the fundamentals are strong for continued manufacturing recovery driven by pent-up consumer demand, repair and replacement of business equipment, and exports," said Daniel Meckstroth, chief economist at Manufacturers Alliance/MAPI in Arlington, Virginia.

"The minor setback in February is expected to be followed by strong makeup gains in March."

Mining increased 2.0 percent, adding to the 1.1 percent rise in January, while utilities gained 0.5 percent after a 0.6 percent rise.

Capacity utilization, a measure of slack in the economy, inched up to 72.7 percent, the highest since December 2008, from 72.5 percent in January. That was still 7.9 percentage points below the average from 1972 to 2009, the Fed said.

A third report from the Treasury Department showed foreign investors sold a net $33.4 billion of all U.S. securities in January but remained net buyers of U.S. Treasury debt.

(Additional reporting by Wanfeng Zhou and Steven C Johnson in New York; Editing by Andrew Hay)