WRAPUP 2-U.S. factory, housing data suggest economy losing steam

Mon Oct 28, 2013 1:00pm EDT

* Manufacturing production edges up 0.1 percent
    * Pending homes sales tumble
    * Higher interest rates seen weighing on economy


    By Lucia Mutikani
    WASHINGTON, Oct 28 (Reuters) - U.S. manufacturing output
barely rose in September and contracts to buy previously owned
homes recorded their largest drop in nearly 3-1/2 years, the
latest signs the economy's momentum ebbed as the third quarter
ended.
    The reports on Monday showed economic activity was on weak
footing even before a 16-day partial shutdown of the U.S.
federal government early in October that is expected to weigh on
fourth quarter growth.
    "The economy seems to be losing steam as higher mortgage
rates have hit the housing market and destructive government
policy will likely bash the rest of the economy," said Joel
Naroff, chief economist at Naroff Economic Advisers in Holland,
Pennsylvania.
    Manufacturing production edged up 0.1 percent last month
after advancing 0.5 percent in August, the Federal Reserve said.
    Factory output was held back by a 0.5 percent drop in
computer and electronic goods production. Output of electrical
appliances also fell.
    While automobile output increased 2.0 percent, that was a
sharp slowdown from the 5.2 percent rise logged in August.
    Separately, the National Association of Realtors said its
Pending Homes Sales index, based on contracts signed last month,
plunged 5.6 percent to the lowest level since December. 
    The decline was the largest since May 2010.
    The index, which leads home resales by a month or two, has
now dropped for four straight months. Realtors believe home
resales, which dropped in September, peaked in July and August. 
    The reports come on the heels of data last week showing a
gauge of business spending tumbled in September. That data,
combined with a disappointing reading on hiring released earlier
this month, has offered a dull picture of economic activity.
    Thomas Costerg, U.S. economist at Standard Chartered Bank in
New York, said a run up in interest rates over the summer on
expectations the Fed would soon trim its bond-buying stimulus
appeared to be holding back the economy.
    "This will make the Fed even more cautious when they next
start to hint at tapering," he said.
    Rates on 30-year fixed rate mortgages rose to an average of
4.49 percent in September from an average of 3.54 percent in
May, according to Freddie Mac. But a surprise decision by the
central bank in mid-September not to cut its purchases and soft
economic data have pulled rates lower since then.
    With politicians in Washington still to agree on a budget,
uncertainty over fiscal policy may also continue to hinder
growth, making it unlikely the Fed will be in a hurry to start
scaling back its purchases.
    Fed officials meet on Tuesday and Wednesday and are expected
to maintain their $85 billion per month bond-buying pace.
    
    
    WEAK DOMESTIC AND GLOBAL DEMAND
    While manufacturing accounts for only about 12 percent of
U.S. economic activity, it was the main driver of the economy
from the 2007-09 recession. 
    Factory output rose at a 1.2 percent rate in the third
quarter, rebounding from a 0.1 percent fall in the prior three
months. Economists expect manufacturing slowed in October as the
federal government shutdown hurt business confidence.
    The weak manufacturing data contrasts with fairly upbeat
business surveys. For example, a closely watched gauge from the
Institute for Supply Management has been pushing higher since
contracting in May. 
    "We are inclined to focus on actual activity gauges like
manufacturing production, rather than surveys, which have given
several false signals during this recovery," said Peter
D'Antonio, an economist at Citigroup in New York. 
    "The soft manufacturing output reflects weakness abroad,
little need to build inventories, and the general slowdown in
demand in the first half of the year."
    Despite the softness in factory output, a rebound in
utilities output lifted overall industrial production 0.6
percent, the largest increase since February.
    Utilities rebounded 4.4 percent in September after five
straight months of declines. Mining production rose 0.2 percent,
but that was a slowdown from at 0.6 percent increase in August.
    Last month, the amount of industrial capacity in use rose to
78.3 percent, the highest level since July 2008, from 77.9
percent in August.