Friday, January 15, 2010

U.S. Economy: Industrial Production, Confidence Climb (Update1)

By Courtney Schlisserman and Timothy R. Homan

Jan. 15 (Bloomberg) -- Production in the U.S. rose for a sixth consecutive month, consumers gained confidence and price increases slowed, indicating the economic recovery is being sustained into 2010 without generating inflation.

Output climbed 0.6 percent in December for a second month, according to figures from the Federal Reserve issued today in Washington. The cost of living increased 0.1 percent last month, less than the median forecast of economists surveyed by Bloomberg News, and sentiment reached a four-month high in January, other reports showed.

Manufacturers may ramp up production in coming months to rebuild stockpiles and meet rising global demand that’s lifting profits at companies including Intel Corp. The rebound so far has soaked up a quarter of the excess capacity created by the worst recession since the 1930s, giving the Fed scope to keep interest rates close to zero through the first half of the year.

“The economy is on a pretty good track on the recovery side and inflation is not a problem,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts, who correctly forecast the increase in consumer prices. “The Fed can be pretty relaxed, at least for the moment, and focus on making sure this recovery is sustainable.”

Stocks Drop

The Standard & Poor’s 500 Index dropped the most in a month after JPMorgan Chase & Co. reported a loss in its retail banking division and a stronger dollar pulled down commodity prices. The S&P 500 fell 1.1 percent to 1,136.03 at 4:05 p.m. in New York, the biggest decline since Dec. 17.

The increase in production matched the median forecast of 76 economists surveyed by Bloomberg. Estimates ranged from no change to a gain of 1.1 percent. The stretch of increases at the end of 2009 was the longest in a decade.

Production was propelled by a jump in utility use as temperatures turned colder. Utility demand climbed 5.9 percent, the biggest jump in two decades. December was colder than average, according to the National Oceanic and Atmospheric Administration, prompting Americans to turn up the heat.

Manufacturing dropped 0.1 percent as losses in auto and mineral production offset a 0.9 percent gain in business equipment. Demand for computers, communications gear and semiconductors improved, signaling investment may be picking up.

Another report today showed manufacturing accelerated in the New York Fed region this month. The Fed Bank of New York’s general economic index rose to 15.9 from 4.5 in December. Readings above zero in the so-called Empire State Index signal manufacturing expansion in the state and parts of New Jersey and Connecticut.

‘Solid’ Quarter

“We’re turning up,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “Inventories are the spark of the recovery,” he said, and growth “looks pretty solid for the fourth quarter.”

Intel, the world’s largest chipmaker, yesterday projected bigger first-quarter sales than analysts had estimated, a sign the computer industry has shaken off the effects of the recession. The Santa Clara, California-based company, which supplies chips to more than 80 percent of the world’s computers, expects its profit margin to hit a 10-year high this year as consumers snap up laptops and businesses loosen the purse strings on technology budgets.

“My expectation for 2010 is that we’re going to see robust unit growth,” Chief Financial Officer Stacy Smith said in an interview. “The consumer segments of the market will stay pretty strong, and I do believe we are going to see a resurgence in PC client sales.”

Spare Capacity

Capacity utilization, which measures the proportion of plants in use, increased to 72 percent in December, the highest level in a year, from 71.5 the prior month, the Fed’s production report also showed. It was forecast to rise to 71.8 percent, according to the survey median.

The plant-use rate averaged 80 percent over the past two decades and reached a record low 68.3 percent in June. Excess capacity is one reason economists project inflation will remain low.

The increase in the consumer-price index last month followed a 0.4 percent gain in November, the Labor Department reported. The median forecast of economists surveyed projected a 0.2 percent advance.

Excluding food and energy costs, the so-called core index also increased 0.1 percent. Companies may have little success raising prices with unemployment projected to average 10 percent this year, the highest annual rate in seven decades.

“Consumer pricing pressures remain very subdued,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who accurately forecast the rise in the core rate. “It gives the Fed further leeway to continue keeping rates where they are well through 2010.”

The Reuters/University of Michigan preliminary index of consumer sentiment for January increased to 72.8, less than anticipated, from 72.5 in December. The gauge averaged 66.3 last year after reaching a record 28-year low of 55.3 in November 2008. .”

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