Signs Gathering Of Slowing US Factory Output
By Michael S. Derby
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The modest boom recently enjoyed by the U.S. factory sector may already be starting to peter out.
That's the opinion of a number of economists, who point to a series of regionally-focused indexes - including Thursday's generally weak Philadelphia Federal Reserve manufacturing report - that together point to a segment of the economy that may well be running out of steam.
Because these reports are leading indicators for industrial production, there's ample reason to expect a much reduced pace of growth in industrial activity in the near future, probably by the spring.
"The numbers have been sobering," said Carey Leahey, an economist at Deutsche Bank in New York.
If the fears are confirmed, the slowdown will serve as yet another sign that the economy, from consumer spending through to the business sector, is still having trouble getting real momentum behind a recovery.
The sting would be further worsened because in recent months, the factory sector was one of the few bright spots in an economy that closed out the year with weak overall growth, a dismal end of year holiday spending season and declining consumer confidence levels.
Indeed, the Federal Reserve recently reported industrial output grew by a much-better-than-expected 0.7% in January, stirring optimism that maybe the recovery was finally beginning to accelerate.
Warning Signs
The data that's got economist worried originate from the New York and Philadelphia Federal Reserves banks. On Tuesday, the New York Fed released its February manufacturing survey, which fell from a record 20.7 in January to 1.1. That index signaled growth, but not much of it.
The Philadelphia Fed weighed in with its more established manufacturing survey Thursday. The bank said its business conditions index moved to a 2.3 reading in February versus 11.2 for January. The February index was well under economists' forecasts of a 12 reading.
Both reports' readings are what are known as diffusion indexes and as long as they're above zero point to expanding activity.
Both are also frequently used as proxies for forecasting the monthly Institute for Supply Management manufacturing index, which itself is used to help predict the level of the Fed's industrial production report. So while there are a few more steps to go through, economists don't like what they see.
Based on what's taken place so far, it's likely the ISM index would ebb to around 51 from the 53.9 already reported for January, said Leahey, at Deutsche Bank.
An ISM reading of 50 indicates stasis in the factory sector, and anything under that mark points to contraction. Economists warn something like a 51 on an upcoming ISM - the next report is released March 3 - would almost certainly see much more modest industrial production reports out of the Fed.
If the scenario plays out as expected, industrial production levels will probably flatten out, but not contract, by some time in the spring.
What's seen in the ISM data "usually leads industrial production by one or two months," said Brian Fabbri, an economist with BNP Paribas in New York. Indeed, the rise in the January industrial production report was "foretold" by the factory surveys.
While it will be critical to see what the closely-watched Chicago Purchasing Management survey shows at the end of the month, the trends are clearly pointing toward reduced manufacturing output, in large part due to likely cutbacks in the auto output, Fabbri said.
Most agree that even if industrial production does soften, the Fed won't have much of a response. Central bank officials have repeatedly said the main factor retarding better growth levels is the anxiety that's created primarily by the looming prospect of war.
The Fed officials believe that only when that veil is lifted will the economy move back toward its true growth potential level. Fed Chairman Alan Greenspan, in testimony before Congress last week, even argued against the need for any short term fiscal stimulus, indicating that it would be wasted in an economy that's being waylaid by uncertainty.
-Michael S. Derby, Dow Jones Newswires; 201-938-4192;
michael.derby@dowjones.com
(END) Dow Jones Newswires
02-20-03 1722ET- - 05 22 PM EST 02-20-03 |
