Consumer Sentiment Rebounds; Industrial Output Weak

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Carlos Osorio/AP
By Lucia Mutikani

WASHINGTON -- U.S. consumer sentiment rebounded strongly in early October, suggesting that the economic recovery remained on track despite headwinds from a strong dollar and weak global demand that have weighed on the industrial sector, particularly manufacturing.

The snapback in sentiment reported Friday underscored robust domestic demand and offered hope that consumer spending would remain solid enough to support economic growth, which has slowed significantly in recent months.

The University of Michigan said its consumer sentiment index rose to 92.1 in early October from a reading of 87.2 September. The survey's current conditions sub-index shot up to 106.7 this month from 101.2 in September.

%VIRTUAL-pullquote-This suggests that U.S. household sentiment has turned an important corner...%The index at current levels has historically been consistent with roughly a 4 percent annualized rate of consumer spending growth, according to economists.

"This suggests that U.S. household sentiment has turned an important corner, and is a hopeful sign on the outlook for consumer spending activity going forward, given signs of weakness in other parts of the economy," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The rise in sentiment, which likely reflected cheaper gasoline prices, suggested limited impact from recent stock market volatility. Consumers were the most optimistic about their personal financial expectations since 2007.

Their views toward purchases of long-lasting manufactured goods were equally bullish.

Consumer spending accounts for more than two-thirds of U.S. economic activity and has been the bright spot in the economy as the industrial sector wobbles under the onslaught of slowing global growth and the resurgent dollar, which have eroded demand for U.S. manufactured goods.

It is also being weighed down by lower energy oil prices that have undercut capital investment in the energy sector, as well as an effort by businesses to whittle down their inventories.

U.S. stocks were trading higher Friday, while prices were U.S. Treasuries were mostly weaker. The U.S. dollar rose against a basket of currencies.

Weak Industrial Production

In a separate report, the Federal Reserve said industrial output slipped 0.2 percent on renewed weakness in oil and gas drilling after slipping 0.1 percent in August. Industrial production rose at an annual rate of 1.8 percent in the third quarter.

"We do not expect the recent slowing to lead to a broader pullback in aggregate growth, as service sector activity remains solid," said Jesse Hurwitz, an economist at Barclays in New York.

Manufacturing accounts for about 12 percent of the U.S. economy. Still, the weak industrial production report added to soft trade, retail sales and employment data that have pointed to a significant slowdown in growth after the economy expanded at a 3.9 percent annual pace in the second quarter.

Third-quarter growth estimates are currently around a 1.5 percent rate. Slower growth and low inflation have diminished expectations of an interest rate hike from the Fed this year.

Manufacturing output fell 0.1 percent in September even though robust demand for automobiles lifted motor vehicle and parts production by 0.2 percent. Manufacturing output dropped by 0.4 percent in August. For the third quarter, manufacturing output increased at a rate of 2.5 percent.

There were declines in the production of computer and electronic products, as well as electronic equipment, appliances and components. Primary metals and machinery output increased.

Mining production fell 2 percent as oil and gas well drilling tumbled 4 percent after increasing for two straight months. An almost 60 percent plunge in oil prices since June 2014 has hurt the profits of oil-field companies such as Schlumberger (SLM) and Halliburton (HAL), leading to deep cuts in their capital spending budgets.

Utilities production increased 1.3 percent in September. With output declining, industrial capacity use fell to 77.5 percent from 77.8 percent in August.

Officials at the Fed tend to look at capacity use as a signal of how much "slack" remains in the economy and how much room there is for growth to accelerate before it becomes inflationary.

The lackluster industrial production picture was reflected in a swathe of manufacturers' results Friday, with General Electric (GE) and Honeywell International (HON) reporting drops in revenue along with profits that were better than forecast.

10 PHOTOS
9 Numbers That'll Tell You How the Economy's Really Doing
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Consumer Sentiment Rebounds; Industrial Output Weak
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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