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U.S. manufacturing struggles; rising income brightens outlook
December 23, 2015 / 2:33 PM / in 2 years

U.S. manufacturing struggles; rising income brightens outlook

WASHINGTON (Reuters) - New orders for U.S. manufactured capital goods fell in November and the prior month’s increase was revised sharply lower as the drag on manufacturing from a strong dollar and spending cuts in the energy sector showed little sign of abating.

CAT machines are seen on a lot at Milton CAT in North Reading, Massachusetts January 23, 2013. REUTERS/Jessica Rinaldi

But the outlook for the economy remains encouraging, with other data on Wednesday showing consumer sentiment at a five-month high in December and personal income rising for an eighth straight month in November. That should support consumer spending and generate enough economic growth for the Federal Reserve to steadily raise interest rates next year.

“The economy is not too cold, and not too hot, it is just right. The Fed can stay the course ... no need to depart from a gradual pace given what we know currently about the economy,” said Chris Rupkey, chief economist at MUFG Union Bank in New York.

The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, dropped 0.4 percent last month. October’s increase in orders for these so-called core capital goods was revised down to 0.6 percent from 1.3 percent.

Manufacturing, which accounts for 12 percent of the economy,is also buckling under businesses’ efforts to reduce an inventory bloat and sluggish global demand, which has curtailed new orders growth. The dollar has gained almost 20 percent against the currencies of the United States’ main trading partners over the last 18 months.

At the same time, plunging crude oil prices, which on Monday plumbed their lowest levels since 2004, have put pressure on oilfield services firms like Schlumberger (SLB.N) and Halliburton (HAL.N), forcing them to slash capital spending budgets.

A survey early this month showed manufacturing contracted in November for the first time in three years.

Core capital goods shipments fell 0.5 percent last month after declining 1.0 percent in October. Shipments of these goods are used to calculate equipment spending in the government’s gross domestic product measurement.

“Unless we see a big rebound in December or upward revisions, it appears that investment in equipment contracted in the fourth quarter,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

A separate report showed the University of Michigan’s consumer sentiment index increased to 92.6 this month, the highest reading since July, from 91.3 in November. Low inflation, characterized by deep discounts at shopping malls, accounted for the rise in sentiment this month.

The report also showed that consumers’ attitudes towards purchases of long-lasting manufactured goods such as motor vehicles and other big-ticket items hit their highest level since 2005.

WAGES RISING

Prospects for consumer spending next year also got a boost from another report from the Commerce Department showing income increased 0.3 percent last month after gaining 0.4 percent in October. Wages and salaries advanced 0.5 percent, adding to a 0.6 percent gain in October.

U.S. stocks rose on the mixed data, with sentiment also buoyed by a rebound in oil prices. The dollar firmed against a basket of currencies, while U.S. Treasuries fell.

A tightening labor market, marked by an unemployment rate that is in a range some Fed officials consider consistent with full employment, is starting to lift wages.

While that could generate price pressures, inflation will likely remain below the U.S. central bank’s 2 percent target because of the oil price rout.

“The Fed understands that the competing factors will be with us for a while and that is why it is easy for the members to say that rates will be increased gradually,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

The Fed hiked its benchmark overnight interest rate last week by 25 basis points to between 0.25 percent and 0.50 percent, the first increase since mid-2006.

The personal consumption expenditures price index rose 0.4 percent in the 12 months through November, the largest increase since December, after increasing 0.2 percent in October. Excluding food and energy, the so-called core PCE price index rose 1.3 percent in the 12 months through November, for the 11th straight month. It is the Fed’s preferred inflation measure.

The Commerce Department’s Bureau of Economic Analysis inadvertently released part of the consumption portion of its report late on Tuesday.

Reporting by Lucia Mutikani; Editing by Paul Simao

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