Anemic Factory Data Point to Moderate Growth Bounce

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Factory Orders
Keith Srakocic/AP
By Lucia Mutikani

WASHINGTON -- U.S. factory activity failed to gain steam in April after slowing for five straight months, but stronger-than-expected vehicle sales suggested the economy was finding some momentum after almost stalling in the first quarter.

Still, the sluggishness in the manufacturing sector and other data Friday showing construction spending hit a six-month low in March indicated that the anticipated acceleration in growth in the second quarter could disappoint.

That could see the Federal Reserve delaying raising interest rates until later this year.

%VIRTUAL-pullquote-The reacceleration in growth will not come fast enough for many, especially those looking for a liftoff by the Fed to happen sooner.%The economy expanded at a 0.2 percent annual pace in the first three months of the year, slammed by bad weather, a strong dollar and a now-resolved labor dispute at the West Coast ports, as well as lower oil prices, which have undercut domestic energy production.

"The reacceleration in growth will not come fast enough for many, especially those looking for a liftoff by the Fed to happen sooner," said Diane Swonk, chief economist at Mesirow Financial in New York.

The Institute for Supply Management said its index of national factory activity was at 51.5 in April, matching the March reading, which had been the lowest since May 2013.

The index had declined since November and economists had expected it to rise to 52 in April. A reading above 50 indicates expansion in the manufacturing sector.

While new orders rose last month, a gauge of factory employment contracted for the first time since May 2013 and recorded its lowest reading since September 2009.

Manufacturing has been hit by the dollar's 12 percent appreciation against the currencies of the United States' main trading partners since June.

The buoyant currency has hurt export growth and profits of multinational corporations, including Procter & Gamble (PG), the world's largest household products maker, and prompted Colgate-Palmolive (CL) and healthcare conglomerate Johnson & Johnson (JNJ) to cut their profit forecasts for the full year.

Whirlpool (WHR), the world's largest maker of home appliances, lowered its profit forecast and sales outlook for 2015.

Manufacturing, which accounts for about 12 percent of the U.S. economy, is also being pressured by the lower oil prices, which have caused oil-field companies to slash spending on exploration and well drilling.

Caterpillar (CAT) has warned the dollar and weak oil prices will hurt profits this year.

U.S. stocks were trading higher. The dollar rose against a basket of currencies, while U.S. Treasury debt prices fell.

Regaining Footing

Despite the economy's struggles, there is no doubt it is starting to regain its footing. General Motors (GM) and Ford Motor (F) reported stronger-than-expected auto sales in April on robust demand for trucks and crossover and sports utility vehicles.

Demand for autos is likely to remain solid in the months ahead. In a separate report, the University of Michigan said its overall index on consumer sentiment rose to 95.9 this month, the second highest level since 2007, from 93 in March.

Consumers were upbeat about both current conditions and expectations for the future. More consumers said it was a good time to buy a major household item and a vehicle. There was also an increase in consumers saying it was a good time to buy and sell a house, which should support home sales.

"This suggests that there may be some upside risk for durable goods spending in the second quarter ... and that perhaps housing market activity will pick up in the months ahead," said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Separately, the Commerce Department said construction spending slipped 0.6 percent to an annual rate of $966.6 billion in March, the lowest level since September.

Construction spending was weighed down by a 1.6 percent decline in private residential construction spending, the biggest such decline since June. Public construction outlays were also weak.

"We think the outlook for residential construction is positive in 2015 as household formation appears to have picked up and as house price gains have remained firm," said John Ryding, chief economist at RDQ Economics in New York.
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