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US industrial output falls, signals weak first-quarter GDP growth

US industrial output falls, signals weak first-quarter GDP growth
April 16, 2016
WASHINGTON – US industrial production fell more than expected in March as manufacturing output dropped by the most in a year and mining maintained its downward trend, the latest indication that economic growth braked sharply in the first quarter. A rebound in growth is, however, anticipated despite other data on Friday showing a further erosion in consumer sentiment in early April. Economists say a confluence of temporary factors, including an ongoing problem with the model the government uses to smooth the data for seasonal fluctuations, has contributed to lowering growth in the first quarter. The government last year took steps to refine the seasonal adjustment for some components of GDP, which economists said left residual seasonality in the data. "The first quarter was clearly a dud, but there are reasons to be optimistic. There are still measurement issues, with the residual seasonality in GDP, and history shows that reverses in the second quarter," said Ryan Sweet, senior economist at Moody’s Analytics in Westchester, Pennsylvania. Industrial output declined 0.6 percent last month after dropping 0.6 percent drop in February, the Federal Reserve said on Friday. Industrial production has fallen in six of the last seven months. Economists had forecast industrial output falling only 0.1 percent last month. Industrial production fell at an annual rate of 2.2 percentin the first quarter after decreasing at a 3.3 percent pace in the fourth quarter. Industrial capacity use in March fell to its lowest level since August 2010. The report joined data on retail sales, business spending, trade and wholesale inventories in suggesting that economic growth slowed to crawl at the turn of the year. Growth estimates for the first quarter are as low as a 0.2 percent annualized rate. The economy grew at a 1.4 percent rate in the fourth quarter. In a separate report, the University of Michigan said its consumer sentiment index fell to 89.7 early this month from a reading of 91.0 in March amid concerns that slowing economic growth would hamper job creation. Sentiment has declined for four straight months. Households' long-term inflation expectations fell back to their all-time low, which could buy a cautious Federal Reserve more time to keep interest rates at current low levels. "Persistently low price expectations increase the risks of monetary policy remaining highly accommodative for longer than currently expected," said Jesse Hurwitz, an economist at Barclays in New York. The dollar was trading lower against a basket of currencies, while prices for U.S. government debt rose. U.S. stocks were little changed. WORST LIKELY OVER The industrial sector has been undermined by a slowingglobal economy and robust dollar, which have eroded demandfor U.S. manufactured goods. It is also being weighed down by lower oil prices that have undercut capital investment in the energy sector, as well efforts by businesses to reduce an inventory overhang. But there are signs the worst of the industrial sector downturn is over, with recent manufacturing surveys turning higher. A third report on Friday from the New York Federal Reserve showed factory activity in New York state accelerated in April to its highest level in more than a year as new orders and shipments increased. "It is likely the inventory correction and stronger dollar continued to weigh on the output data for the first quarter, and we remain hopeful that the worst of the drags from these factors have passed and that activity will pick up shortly," said Daniel Silver, an economist at JPMorgan in New York. Last month, manufacturing output fell 0.3 percent, the biggest decline since February 2015, after slipping 0.1 percent in February. Manufacturing was dragged down by motor vehicle and parts production, which plunged 1.6 percent after rising 0.8 percent the prior month. For the first quarter, manufacturing output rose at a 0.6 percent rate. Mining production tumbled 2.9 percent as oil and gas well drilling plummeted 8.5 percent after diving 15.8 percent in February. Last month's drop in mining output was the largest since September 2008, when output was curtailed because of hurricanes. Mining production has declined in each of the last seven months. A plunge in oil prices since June 2014 has hurt the profits of oil-field companies like Schlumberger (SLB.N) and Halliburton (HAL.N), leading to deep cuts in their capital spending budgets. Unseasonably warm weather in March hurt utilities output, which fell 1.2 percent after declining 3.6 percent in February. Weak utilities production suggests weak demand for heating, which likely hurt consumer spending. –Reuters
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