Factory Production in U.S. Probably Fell, Homebuilding Gained
Reports on U.S. manufacturing and home building will probably show the recession is within months of hitting bottom, economists said before reports today.
A 1 percent drop in industrial production last month, based on the median of 73 estimates in a Bloomberg News survey, was due mainly to auto-industry shutdowns that swamped gains elsewhere, analysts said Federal Reserve data may show. Other reports may show builders began work on more houses in May and wholesale prices rose.
The fallout from bankruptcies at Chrysler LLC and General Motors Corp. will likely ripple through auto-related industries in coming months, even as other areas show signs of stabilizing. Plunging home prices, low mortgage rates and tax credits for first-time buyers may help bring an end to the worst residential construction slump in seven decades.
“The move down in autos should persist for a couple of months but it shouldn’t persist long enough to drag down the rest of the manufacturing sector,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “The economy was still contracting in May, but the pace of contraction was lessening.”
The Fed’s report on industrial output, which encompasses manufacturing, mining and utility production, is due at 9:15 a.m. in Washington. Forecasts ranged from a decline of 1.7 percent to an increase of 0.3 percent. A decrease would be the 16th in the last 17 months.
The report is also projected to show the proportion of plant capacity in use dropped to 68.4 percent, the lowest level since records began in 1967, according to the survey median.
Auto Shutdowns
Chrysler shut all its plants on May 1 to clear as many unsold vehicles as possible from dealer lots while it restructures. The sale of most of Chrysler’s assets to a group led by Italian automaker Fiat SpA was completed last week.
GM, the biggest U.S. automaker, said June 1 it is stopping work at 14 plants as it restructures under Chapter 11.
General Electric Co. is among companies starting to see some improvement in economic conditions. Chief Executive Officer Jeffrey Immelt said at a conference last week that government efforts to thaw credit are starting to pay off, making it easier for companies to borrow.
“Capital markets have largely healed,” Immelt said. “As a company you have to invest now cash loans with bad credit. You have to invest when things are darkest.” Immelt predicted the economic recovery will be slower than that following the 1982 recession, the last slump that approached the severity of the current downturn.
Limit Inflation
One positive aspect of the excess in capacity is that it will help control inflation should raw-material costs keep rising, economists say.
Producer prices probably rose 0.6 percent in May, double the prior month’s gain, as fuel costs climbed, according to the median estimate before the Labor Department’s 8:30 a.m. report.
Core costs, which exclude food and energy, rose 0.1 percent for a second month, according to the survey median.
“The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued,” Fed Chairman Ben S. Bernanke told Congress on June 3. “We anticipate that inflation will remain low.”
Concern over the amount of money the Fed has pumped into financial markets and the size of upcoming government securities auctions to pay for stimulus efforts has caused interest rates on Treasuries to shoot higher in recent weeks.
Rates Jump
The yield on the benchmark 10-year note reached as high as 3.95 percent at the close on June 10, after being as low as 2.54 percent on March 18, the day the Fed announced it would buy Treasury securities in a bid to push borrowing costs down.
The increase is pushing up mortgage rates, threatening to undermine signs of bottoming in the housing recession that triggered the credit crisis and global slump. Recent reports have shown sales and construction have stabilized near historically low levels.
A report from the Commerce Department at 8:30 a.m. may show housing starts last month rose 5.9 percent to a 485,000 annual pace from the prior month’s five-decade low, the survey showed. Permits rose to 508,000 from the prior month’s record low of 498,000.
Builders are still hurting after having to mark down prices in an effort to spur demand. Toll Brothers Inc. and Hovnanian Enterprises Inc. last week both reported their second-quarter losses exceeded analysts’ estimates.
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