Analysts Welcome Output, Inventory Data
Wednesday August 15, 2:06 pm Eastern Time
By Jonathan Nicholson
WASHINGTON (Reuters) - Two U.S. economic reports released on Wednesday showed factory production halted its long slide in July and U.S. businesses pared their inventory levels in June in positive signs for the economic outlook.
The Federal Reserve said overall industrial output -- of which factory production is the biggest component -- slipped 0.1 percent in July. It was the 10th straight month production has declined, and factories, mines and utilities operated at a slow 77.0 percent of their full capacity.
But analysts latched on to the unchanged reading in manufacturing output, calling it a glimmer in a sector which, buffeted by domestic oversupply and a strong dollar that hurts sales overseas, may have put the worst behind it.
``I think we're witnessing a trough,'' said Gordon Richards, an economist with the National Association of Manufacturers.
``We should be seeing a return to positive industrial production, if not by August, then probably by September.''
Separately, the Commerce Department said inventories at U.S. businesses fell by 0.4 percent in June, their fifth consecutive decline. Business sales fell a sharp 1.4 percent.
The production number was better than Wall Street had been projecting, while the inventory decline was a bit bigger than the 0.3 percent that had been anticipated.
Stock markets largely looked past the reports and focused on weakness in technology shares. The Dow Jones industrial average was off by 32 points in noontime trading, while the tech-laden NASDAQ composite fell by 34 points.
SLUMP STATUS DEBATED
Since last year, the U.S. manufacturing sector has had the most difficulty in dealing with a slowing U.S. economy. Factories shed 49,000 jobs in July, the latest in a string of losses that started in 2000.
Businesses, in a rush to invest in new and more productive equipment, had over-invested in big-ticket items, which left excess capacity when demand fell. That slump in business equipment investment acted as a drag on economic growth in the first and second quarters of the year, with the second quarter's 0.7 percent pace of growth the lowest since 1993.
The continued decline in demand led manufacturers, in particular the NAM, also to focus on the strength of the U.S. dollar against other currencies. A stronger dollar makes American-made goods more expensive in foreign markets. But efforts by the NAM to get the Treasury Department to back down from its unswerving greenback support have been rebuffed.
Now signs are emerging that the slump has hit bottom. The Fed's report showed a bounceback in the automotive sector, with vehicle production rising to an annual rate of 12.09 million, the fastest pace since October 2000. And while July output posted a 10th straight month of decline, it was the smallest decrease since the string of drops began in October.
``The manufacturing recession is over, probably,'' said Sung Won Sohn, chief economist with Wells Fargo & Co. in Minneapolis.
Other analysts are less convinced, however, noting weakness remains in other areas, especially high tech goods. Production of business equipment was off by 0.3 percent in July.
``The results are encouraging but enthusiasm should be restrained,'' said Mike Moran, chief economist with Daiwa Securities America in New York. ``The July results followed the worst showing of the year and may have simply reflected month-to-month volatility.''
CLOUDS FED OUTLOOK
Wednesday's other release, business inventories, was more ambiguous. While inventories fell, sales fell much faster, leaving a key measure of inventory bloat higher.
Commerce said the inventory-to-sales ratio, which measures how long it would take to completely draw down current stocks, rose to 1.43 months in June from 1.42 months in May. The ratio at retailers, however, dipped in June, indicating leaner inventories on store shelves.
The Federal Reserve's Open Market Committee will mull Wednesday's figures at its next policy-setting meeting, which is set for Tuesday. Most analysts expect the central bank to trim interest rates another quarter of a percentage point, but a recent string of marginally better-than-expected economic data is raising questions about the need for much more than that ahead.
``When you look at the overall economy, I can realistically say it bottomed in the second quarter,'' Wells Fargo's Sohn said. |
