U.S. factory decline suggests economy losing steam

WASHINGTON Tue Apr 17, 2012 3:30pm EDT

A construction worker builds a new home at a development area in San Marcos, California March 20, 2012. REUTERS/Mike Blake

A construction worker builds a new home at a development area in San Marcos, California March 20, 2012.

Credit: Reuters/Mike Blake

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WASHINGTON (Reuters) - Output at U.S. factories slipped in March and builders started construction on fewer homes, offering cautionary signals for an economy that appeared to be gaining traction.

Manufacturing output slipped for the first time in four months, dropping 0.2 percent, the U.S. Federal Reserve said on Tuesday.

The decline dragged on overall industrial production which was unchanged and fell short of analysts' expectations.

"It looks pretty bad on the face of it," said Tom Porcelli, an economist at RBC Capital Markets in New York.

Surging exports and efforts by companies to restock their shelves have made economic growth look more solid in recent weeks.

The factory data did little to change that view, but economists said it suggested the recovery lost a little steam at the close of the first quarter, in part due to headwinds from Europe's debt crisis, which is weighing on global growth.

"(It) raises the possibility that the recent easing in global demand is starting to take a toll on U.S. manufacturers," said Paul Dales, an economist at Capital Economics in London.

Signs of a cooldown in growth became apparent earlier this month when a report showed hiring slowed sharply in March.

Still, Porcelli and others said the factory sector, which has been a key driver of America's recovery from the 2007-2009 recession, appeared to have enough momentum to continue growing.

Auto production, for example, increased 0.6 percent after rising 0.8 percent in February. Also, initial estimates for manufacturing output in February were revised higher.

Citing these factors, Goldman Sachs on Tuesday raised its forecast for first-quarter growth in gross domestic product to a 2.6 percent annual rate from 2.5 percent. That would be a slowdown from the 3 percent rate clocked in the fourth quarter, but still faster than many analysts expected a few weeks ago.

HOME PERMITS RISE

A separate report on new home construction also provided mixed signals.

Housing starts slipped 5.8 percent in March to a seasonally adjusted annual rate of 654,000 units, the Commerce Department said.

That unwinds some of the incipient recovery seen in recent months in the long-moribund U.S. housing sector. At the same time, the data still suggests housing construction will add to gross domestic product during the first quarter, said Millan Mulraine, a macro strategist at TD Securities in New York.

Also, new permits for home construction surged to their highest level in 3-1/2 years, which could lead to more housing construction in coming months.

Although many economists think homebuilding could add to economic growth this year for the first time since 2005, an oversupply of unsold homes is depressing prices, creating a big hurdle for the sector.

"It's going to be rocky for a while," said Gregory Miller, an economist at Suntrust Banks in Atlanta, adding the data pointed at best to a tentative recovery.

Some analysts speculated that a mild winter in the United States led homebuilders to start new projects ahead of schedule, and that March's decline amounted to a payback.

U.S. stocks rose and government debt prices fell as investors welcomed a slew of corporate results and as a decline in borrowing costs for Spain eased concerns about Europe's debt crisis.

Coca-Cola Co posted higher-than-expected quarterly profits and its chief executive said the company saw signs the U.S. economy was improving. Goldman Sachs Group Inc said its first-quarter profit fell from a year earlier, but the drop was milder than analysts had expected.

The drops in factory output and housing starts will give Fed policymakers more to chew on when they review interest rate policy next week.

Stronger economic data has made the central bank more reluctant to consider further monetary stimulus.

(Additional reporting by Lucia Mutikani in Washington and by Julie Haviv, Ryan Vlastelica and Richard Leong in New York; Editing by Andrea Ricci)

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