Robust Factory Output Boosts U.S. Economic Outlook

wholesale prices
LM Otero/APSUVs rolling off the assembly line at a General Motors auto plant in Arlington, Texas.
By Lucia Mutikani

WASHINGTON -- U.S. manufacturing output rose broadly in July and automobile production recorded its largest increase in five years, boosting the economy at the start of the third quarter.

While other data Friday showed some cooling in factory activity in New York state this month, economists said it didn't change the view of an economy with strong momentum, noting that the pullback followed a robust increase in July.

%VIRTUAL-pullquote-The broad-based nature of the [manufacturing] gains indicates that the strong second-quarter rebound in economic growth momentum is being sustained.%"The broad-based nature of the [manufacturing] gains indicates that the strong second-quarter rebound in economic growth momentum is being sustained," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Federal Reserve said factory production jumped 1 percent last month after rising 0.3 percent in June. That was the largest gain since February and reflected increases across all major categories.

Auto production surged 10.1 percent, the biggest rise since July 2009. There were also sturdy gains in the production of machinery and computers and electronic goods, which economists said hinted at a pick-up in business investment this quarter.

A stronger pace of business investment is needed to ensure sustained economic growth.

The economy grew at a 4 percent annual pace in the second quarter and current forecasts peg the growth rate for the third quarter within a range of 2.5 percent to 3 percent.

Industrial capacity utilization, a measure of how fully firms are using their resources, last month hit its highest level since February 2008.

The solid rise in manufacturing and a 0.3 percent advance in mining output helped to offset a 3.4 percent weather-driven decline in utilities production. That left overall industrial production up 0.4 percent in July.

The data had little impact on U.S. financial markets, with traders focusing instead on events in Ukraine. The Ukrainian government said its forces had attacked and partly destroyed a Russian armored column that entered Ukrainian territory overnight.

Benign Producer Inflation

In a separate report, the New York Fed said its "Empire State" general business conditions index fell to 14.69 this month from 25.60 in July.

A reading above zero indicates expansion. Growth in new orders slowed, but a further decline in inventories pointed to an acceleration in activity in the months ahead.

While manufacturing is gaining steam, there is little sign of a broad pick-up in inflation pressures at the factory gate.

In another report, the Labor Department said its Producer Price Index for final demand edged up 0.1 percent in July as the cost of energy products fell, offsetting an increase in food prices.

Prices received by the nation's farms, factories and refineries rose 0.4 percent in June. In the 12 months through July, producer prices increased 1.7 percent.

Excluding food and energy, wholesale prices gained 0.2 percent, matching June's increase. They were up 1.6 percent in the 12 months through July.

"Aside from recent energy weakness, the PPI results continued to point to a steady firming in underlying inflation trends that we expect to continue to be seen in a continued inflection higher in the core consumer price index as well," said Ted Wieseman, an economist at Morgan Stanley (MS) in New York.

Overall, inflation has been rising in recent months, a fact acknowledged by the Fed at its July policy meeting. The U.S. central bank, which had repeatedly warned that price pressures were too low, said the likelihood of inflation running persistently below its 2 percent target had diminished somewhat.

Firming inflation and a tightening labor market have led some economists to anticipate an early interest rate increase from the Fed. The central bank, however, has shown no sign of being in a hurry to lift its benchmark lending rate from near zero, where it has been since December 2008.

Another report Friday showed consumer sentiment hit a nine-month low in early August. The Thomson Reuters/University of Michigan's consumer sentiment index fell to 79.2 from 81.8 in July.

-With additional reporting by Sam Forgione and Rodrigo Campos in New York.

9 Numbers That'll Tell You How the Economy's Really Doing
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Robust Factory Output Boosts U.S. Economic 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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