Factory, Consumer Confidence Data Darken Q2 Outlook

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By Lucia Mutikani

WASHINGTON -- U.S. industrial production unexpectedly fell for a fifth straight month in April due in part to a further decline in oil and gas drilling, suggesting that the economy is growing at only a modest pace in the second quarter.

The economy's struggle to pick up steam after a dismal first quarter was underscored by other data on Friday showing a drop in consumer confidence to a seven-month low in early May and only a mild rebound in factory activity in New York state.

Coming on the heels of weak retail sales and producer inflation data this week, the reports suggest the Federal Reserve probably won't raise interest rates anytime soon.

%VIRTUAL-pullquote-These are not the numbers that would inspire confidence in the Fed to tighten policy.%"It means in the next month or so we are unlikely to see a massive rebound in growth momentum. These are not the numbers that would inspire confidence in the Fed to tighten policy," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Industrial output slipped 0.3 percent after a similar decline in March, the Fed said. Economists had expected a 0.1 percent gain.

A plunge of 14.5 percent in oil and gas well drilling pushed mining production down 0.8 percent last month. It was the fourth straight monthly decline in mining output.

Crude oil prices have fallen by about 50 percent since last June, resulting in a sharp drop in well drilling activity.

Companies such as Schlumberger (SLM), the world's No. 1 oilfield services provider, and Halliburton have slashed their capital spending budgets for this year. Caterpillar (CAT) has cut its 2015 profit outlook and warned that lower oil prices would hurt its energy equipment business.

Oil and gas drilling is down 46.5 percent over the year and there is no relief in sight despite the recent stabilization of crude oil prices. Oil rig counts continued to decline early in the second quarter.

"We see a further drop in mining investment over the next few quarters and are not convinced that business investment ex-mining will be strong enough to sufficiently offset this drag," said Michelle Meyer, a senior economist at Bank of America Merrill Lynch (BAC) in New York.

Sentiment Sours

In a separate report, the University of Michigan said its consumer sentiment index fell to 88.6 early this month, the lowest reading since October, from 95.9 in April.

There were slight declines in consumers' attitudes toward purchases of motor vehicles and homes.

While economists noted the weak relationship between consumer confidence and consumer spending, they nevertheless saw May's decline as unfavorable. Many of them believe that consumer spending will accelerate in the second quarter as households start drawing on their savings from relatively cheap gasoline prices.

"All things considered, the decline in confidence means that the potential for a pick-up in consumption growth over the next few months is probably smaller than we previously anticipated," said Paul Ashworth, chief economist at Capital Economics in Toronto.

The economy was slammed earlier in the year by bad weather, port disruptions, a strong dollar and deep spending cuts by energy firms. The government reported last month that GDP expanded at a 0.2 percent annual pace in the first quarter.

But trade and inventory data published after the GDP snapshot suggested the economy actually contracted. Second-quarter growth estimates are currently hovering around a 2.5 percent pace, well below the 4.6 percent pace in the same period last year.

U.S. stocks were marginally weaker, while prices for longer-dated U.S. government bonds rose. The dollar slipped against a basket of currencies.

Dollar Dampens Manufacturing

Last month, utilities production tumbled 1.3 percent, also contributing to the weakness in industrial output. Manufacturing production was unchanged after gaining 0.3 percent in March. It was restrained by a 0.9 percent drop in machinery, though motor vehicle production rose.

Manufacturing, which accounts for about 12 percent of the economy, has been dampened by the dollar. Even as the greenback rally fades, factory activity is unlikely to rebound strongly.

In a separate report, the New York Fed said its Empire State general business conditions index rose to 3.09 in May from -1.19 in April. A reading above zero indicates expansion.

While new orders rebounded this month, order books remained depressed and inventories swelled. Labor market indicators also weakened a bit.

"They suggest any pick-up in manufacturing activity will be muted, at best," said Jesse Hurwitz, an economist at Barclays in New York.

9 Numbers That'll Tell You How the Economy's Really Doing
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Factory, Consumer Confidence Data Darken Q2 Outlook
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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