Jones Lang LaSalle
U.S. Economy: Industrial Output Rises for Third Month (Update4)
Jan. 17 (Bloomberg) -- U.S. industrial production rose for a third month in December and factories were the busiest in five years, suggesting the Federal Reserve may keep raising interest rates to head off faster inflation.
Output at factories, mines and utilities rose 0.6 percent after a revised 0.8 percent gain in November, the Fed said today in Washington. Utility production climbed by the most since June, and the share of industrial capacity in use rose to 80.7 percent, the highest since November 2000.
Increased business spending on computers, communications equipment and other machinery may pick up the momentum from consumers heading into the new year, economists said.
Rebuilding after the hurricanes and a surge in natural gas production helped increase factory output last quarter at the fastest rate since 1999. Manufacturing in the New York area continued to expand this month, the Fed also said today.
``From the Fed's perspective, slack in the production sector continues to diminish, which should maintain Fed concerns about upside risk to inflation,'' said John Ryding, chief U.S. economist at Bear Stearns & Co. in New York.
Markets
The dollar rose against the euro and the yen as today's reports increased speculation the U.S. economy is growing fast enough to keep the Fed raising interest rates. The U.S. currency strengthened to $1.2106 per euro at 4:04 p.m. in New York from $1.2127 late yesterday. The dollar climbed to 115.42 yen from 114.96. The yield on the benchmark 10-year note fell 2 basis points, or 0.02 percentage point, to 4.33 percent at 4:09 p.m. in New York, according to bond broker Cantor Fitzgerald LP.
The Federal Reserve Bank of New York said today its index of manufacturing fell to 20.1 this month from a revised 26.3 in December. The so-called Empire State index is one of the first monthly manufacturing reports.
Economists expected industrial production to rise 0.5 percent, the median of 64 estimates in a Bloomberg News survey, after an originally reported 0.7 percent gain. Factory capacity rose from November's 80.3 percent, exceeding the 80.5 percent forecast. The Fed first reported the November figure as 80.2 percent.
Historically, 81 percent is the level where bottlenecks tend to develop, posing a risk of higher inflation, according to economists including Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities in New York.
Inflation
The Fed warned of rising industrial use and a stretched labor market in its Dec. 13 policy statement, when it said ``possible increases in resource utilization'' may ``add to inflation pressures.'' Capacity utilization rose in eight of 12 months last year and remained above year-earlier levels even in September, after Hurricane Katrina struck the U.S. Gulf Coast.
The Labor Department reported Jan. 13 that producer prices excluding food and fuels rose less than forecast, adding to suggestions that inflation remains tame. The consumer price index will be reported tomorrow.
Chicago Fed President Michael Moskow still sees inflation risks as industrial capacity tightens.
``There may be some slack remaining in manufacturing, but probably not much,'' he told a Chicago audience Jan. 12.
The central bank is expected to increase its benchmark interest rate for a 14th straight time, to 4.5 percent, when policy makers meet on Jan. 31, according to a Bloomberg News survey from Dec. 23 to Jan. 9.
Forecast
Economic growth probably slowed to a 3.1 percent annual rate the last three months of 2005 and will accelerate to 3.8 percent this quarter, the same survey showed.
Manufacturing, which accounts for more than 80 percent of the industrial-output index, rose 0.2 percent after a 0.4 percent gain. A decline in auto production held back factory output. Utility production rose 2.7 percent, the most in six months, following November's 0.4 percent gain.
``The most encouraging aspect of the report involves the continuing strong gain in technology output,'' Lynn Reaser, chief economist of the Investment Strategies Group at Bank of America in Boston, said in an interview. ``We had been hoping to see the pendulum swing from the consumer to the business sector. This report suggests that is indeed taking place.''
Mining production, which includes oil and gas, rose 2.5 percent last month after a 4.7 percent jump in November.
Refineries along the U.S. Gulf Coast region are still recovering after hurricanes disabled production. The colder winter months will increase demand for heating oil and gas.
Energy
``We've got tons of crude oil,'' said Mark Waggoner, president of Excel Futures Inc. in Huntington Beach, California. ``The strategic reserve is virtually full and we've got refineries coming back on line'' from hurricane damage last year, he said. ``There's nothing fundamental to hold'' oil prices up.
The resumption of energy production in the Gulf helped lower crude oil prices 9.8 percent from a record $70.85 a barrel on Aug. 30, the day after Hurricane Katrina hit. That may encourage corporate spending.
U.S. industrial production last year began rising in May and didn't fall until September, after refiners, railroads and other companies were forced to shut down Gulf Coast operations because of the storms. Production grew in October by the most in six years as companies began to rebuild.
Business Equipment
Business equipment production, which includes transportation and information processing equipment, rose 0.5 percent in December, after increasing 1.3 percent the month before. Production of defense and space equipment rose 1.7 percent after increasing 0.2 percent.
``As long as the Fed doesn't raise rates too high, I'm fairly optimistic, and that's what I've been hearing from customers,'' said John Chambers, chief executive of Cisco Systems Inc. of San Jose, California, in a presentation at a National Retail Federation conference in New York today. Cisco is the No. 1 maker of equipment that directs Internet traffic.
Production of all consumer goods including autos rose 0.2 percent in December after falling 0.7 percent the month before. Output of automotive products, including cars, fell 2.7 percent after dropping 5.3 percent.
Honda Motor Co., the first Asian automaker to build cars in the U.S., will decide this year whether to add a sixth North American auto assembly plant or enlarge an existing one to meet growing demand, North American Chief Executive Officer Koichi Kondo said in a Jan. 9 interview.
U.S. Economy: Industrial Output Rises for Third Month (Update4)
Jan. 17 (Bloomberg) -- U.S. industrial production rose for a third month in December and factories were the busiest in five years, suggesting the Federal Reserve may keep raising interest rates to head off faster inflation.
Output at factories, mines and utilities rose 0.6 percent after a revised 0.8 percent gain in November, the Fed said today in Washington. Utility production climbed by the most since June, and the share of industrial capacity in use rose to 80.7 percent, the highest since November 2000.
Increased business spending on computers, communications equipment and other machinery may pick up the momentum from consumers heading into the new year, economists said.
Rebuilding after the hurricanes and a surge in natural gas production helped increase factory output last quarter at the fastest rate since 1999. Manufacturing in the New York area continued to expand this month, the Fed also said today.
``From the Fed's perspective, slack in the production sector continues to diminish, which should maintain Fed concerns about upside risk to inflation,'' said John Ryding, chief U.S. economist at Bear Stearns & Co. in New York.
Markets
The dollar rose against the euro and the yen as today's reports increased speculation the U.S. economy is growing fast enough to keep the Fed raising interest rates. The U.S. currency strengthened to $1.2106 per euro at 4:04 p.m. in New York from $1.2127 late yesterday. The dollar climbed to 115.42 yen from 114.96. The yield on the benchmark 10-year note fell 2 basis points, or 0.02 percentage point, to 4.33 percent at 4:09 p.m. in New York, according to bond broker Cantor Fitzgerald LP.
The Federal Reserve Bank of New York said today its index of manufacturing fell to 20.1 this month from a revised 26.3 in December. The so-called Empire State index is one of the first monthly manufacturing reports.
Economists expected industrial production to rise 0.5 percent, the median of 64 estimates in a Bloomberg News survey, after an originally reported 0.7 percent gain. Factory capacity rose from November's 80.3 percent, exceeding the 80.5 percent forecast. The Fed first reported the November figure as 80.2 percent.
Historically, 81 percent is the level where bottlenecks tend to develop, posing a risk of higher inflation, according to economists including Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities in New York.
Inflation
The Fed warned of rising industrial use and a stretched labor market in its Dec. 13 policy statement, when it said ``possible increases in resource utilization'' may ``add to inflation pressures.'' Capacity utilization rose in eight of 12 months last year and remained above year-earlier levels even in September, after Hurricane Katrina struck the U.S. Gulf Coast.
The Labor Department reported Jan. 13 that producer prices excluding food and fuels rose less than forecast, adding to suggestions that inflation remains tame. The consumer price index will be reported tomorrow.
Chicago Fed President Michael Moskow still sees inflation risks as industrial capacity tightens.
``There may be some slack remaining in manufacturing, but probably not much,'' he told a Chicago audience Jan. 12.
The central bank is expected to increase its benchmark interest rate for a 14th straight time, to 4.5 percent, when policy makers meet on Jan. 31, according to a Bloomberg News survey from Dec. 23 to Jan. 9.
Forecast
Economic growth probably slowed to a 3.1 percent annual rate the last three months of 2005 and will accelerate to 3.8 percent this quarter, the same survey showed.
Manufacturing, which accounts for more than 80 percent of the industrial-output index, rose 0.2 percent after a 0.4 percent gain. A decline in auto production held back factory output. Utility production rose 2.7 percent, the most in six months, following November's 0.4 percent gain.
``The most encouraging aspect of the report involves the continuing strong gain in technology output,'' Lynn Reaser, chief economist of the Investment Strategies Group at Bank of America in Boston, said in an interview. ``We had been hoping to see the pendulum swing from the consumer to the business sector. This report suggests that is indeed taking place.''
Mining production, which includes oil and gas, rose 2.5 percent last month after a 4.7 percent jump in November.
Refineries along the U.S. Gulf Coast region are still recovering after hurricanes disabled production. The colder winter months will increase demand for heating oil and gas.
Energy
``We've got tons of crude oil,'' said Mark Waggoner, president of Excel Futures Inc. in Huntington Beach, California. ``The strategic reserve is virtually full and we've got refineries coming back on line'' from hurricane damage last year, he said. ``There's nothing fundamental to hold'' oil prices up.
The resumption of energy production in the Gulf helped lower crude oil prices 9.8 percent from a record $70.85 a barrel on Aug. 30, the day after Hurricane Katrina hit. That may encourage corporate spending.
U.S. industrial production last year began rising in May and didn't fall until September, after refiners, railroads and other companies were forced to shut down Gulf Coast operations because of the storms. Production grew in October by the most in six years as companies began to rebuild.
Business Equipment
Business equipment production, which includes transportation and information processing equipment, rose 0.5 percent in December, after increasing 1.3 percent the month before. Production of defense and space equipment rose 1.7 percent after increasing 0.2 percent.
``As long as the Fed doesn't raise rates too high, I'm fairly optimistic, and that's what I've been hearing from customers,'' said John Chambers, chief executive of Cisco Systems Inc. of San Jose, California, in a presentation at a National Retail Federation conference in New York today. Cisco is the No. 1 maker of equipment that directs Internet traffic.
Production of all consumer goods including autos rose 0.2 percent in December after falling 0.7 percent the month before. Output of automotive products, including cars, fell 2.7 percent after dropping 5.3 percent.
Honda Motor Co., the first Asian automaker to build cars in the U.S., will decide this year whether to add a sixth North American auto assembly plant or enlarge an existing one to meet growing demand, North American Chief Executive Officer Koichi Kondo said in a Jan. 9 interview.
posted by Jones Lang LaSalle NJ News Blog at 10:42 AM
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