Industrial production beats forecast

Industrial production climbed more than forecast in May, a sign gains in manufacturing are supporting growth as the U.S. economy picks up.

Output at factories, mines and utilities rose 0.6% after a revised 0.3% drop in April that was smaller than previously estimated, a report from the Federal Reserve showed today in Washington. The median forecast in a Bloomberg survey called for a 0.5% increase. Manufacturing, which makes up 75% of total production, also increased 0.6%.

Demand for industrial goods is improving as consumer and business spending strengthen and the economy rebounds from its worst performance in three years. Bigger gains in corporate investment and stronger growth in overseas markets will be needed to provide an additional lift for U.S. producers.

“Manufacturing activity is humming along at a fairly constructive pace,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC, who accurately forecast the production gain. “That’s something we expect will continue over the balance of the year.”

Stocks fell as intensifying unrest from Iraq to Ukraine overshadowed corporate deals. The Standard & Poor’s 500 Index (CME:SPM14) dropped 0.2% to 1,932.81 at 9:34 a.m. in New York.

Estimates of the 79 economists surveyed by Bloomberg ranged from a production drop of 0.1% to a 0.8% gain. The prior month was previously reported as a 0.6% decline.
 

Empire State
 

Another report today showed manufacturing unexpectedly picked up this month as orders jumped. The Federal Reserve Bank of New York’s factory index rose to 19.3 for June, the highest in four years, from 19 the prior month. Readings greater than zero signal growth for the so-called Empire State Index that covers New York, northern New Jersey and southern Connecticut.

Economists in the Bloomberg survey projected the Fed’s May industrial production report would show manufacturing, which accounts for about 12% of the U.S. economy, would rise 0.6%.

Today’s report is consistent with data from the Institute for Supply Management that showed manufacturing expanded last month at the fastest pace this year as American assembly-line workers responded to increased orders by cranking up production.

Utility output decreased 0.8% after falling 4.5% in April, today’s Fed report showed. Mining production, which includes oil drilling, climbed 1.3% last month.
 

Business Equipment
 

Business-equipment production increased 0.8% after a 0.1% gain in April. Output of construction materials rose 0.8% after falling 0.6%.

Consumer goods production advanced 0.1%, led by automobiles and appliances and furniture. Output of machinery increased 1.1% after dropping 0.5% in April.

The output of motor vehicles and parts rose 1.5% last month. Auto assemblies climbed to an 11.6 million annualized rate in May, the most this year.

Excluding autos and parts, manufacturing production rose 0.5%.

Gains at General Motors Co. and Ford Motor Co. helped propel a rise in the industry’s monthly annualized sales rate last month. Adjusted for seasonal trends, the sales pace rose to 16.7 million, the highest since February 2007, according to Ward’s Automotive Group.

Ford sees total industry sales for the year of up to 17 million units, including medium and heavy trucks, senior U.S. economist Emily Kolinski Morris said on a June 3 call to discuss May sales.
 

‘Positive Momentum’
 

“Recent readings on housing have improved slightly and the labor market continued its gradual recovery,” she said. “These incoming indicators coupled with the supportive policy backdrop should provide positive momentum for the economy in the current quarter and into the second half.”

Today’s Fed report also showed capacity utilization, which measures the amount of factories. Mines and utilities that are in use, increased to 79.1% in May from 78.9% the month before. For manufacturing alone, it rose to 77%, the highest since March 2008.

The economy may grow at a 3.5% annual clip in the second quarter after contracting at a 1% pace in the first three months of the year, according to a Bloomberg survey of economists. Gains in business and consumer spending will be needed to lift growth and spur employment after the world’s biggest economy was weighed down by harsh winter weather.

The International Monetary Fund today cut its growth forecast for the U.S. economy this year to 2% from an April estimate of 2.8% and d said the Fed may have scope to keep interest rates at zero for longer than investors expect.

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