Gain in Manufacturing Output

Bodes Well for Economic Growth

By MARK WHITEHOUSE

January 18, 2007;PageA2

The U.S. manufacturing sector, one of the weak links in the nation's economy, might not be a drag on economic growth much longer, the latest data suggest. It's also doing its part to keep inflation in check.

The Federal Reserve reported yesterday that U.S. industrial production increased a seasonally adjusted 0.4% in December from the previous month, driven largely by a 0.7% rise in manufacturing output.

While production in housing-related industries, such as furniture, declined or posted only meager gains, output of durable goods, such as home electronics, surged, reflecting the buoyant consumer spending on those items in recent months. The overall rise in output contrasts sharply with the previous three months: After revisions, industrial production showed declines in all three.

Economists saw the production data as broadly consistent with their consensus forecast for 2007: that the economy should regain momentum as slowdowns in housing and manufacturing fade. "This could be an early sign that things are turning around for manufacturing," says Haseeb Ahmed, U.S. economist at J.P. Morgan Chase & Co. in New York.

The picture for manufacturers remains far from ideal. On an annualized basis, production fell 1.4% in the fourth quarter from the third quarter. A slowdown in demand in mid-2006 left manufacturers with large stockpiles of unsold goods: As of November, the latest data available, it would have taken 1.24 months of sales to get rid of their inventories, up from 1.15 months in May.

Some indicators, though, suggest manufacturers' overhang is decreasing, thanks in part to stronger-than-expected consumer spending in the fourth quarter. In the latest survey from the Institute for Supply Management, a trade group for corporate purchasing managers, manufacturers said their inventory levels had fallen in December.

"We are slowly working down inventory," says Steve Wieting, U.S. economist at Citigroup Inc. in New York. "We just got slightly out of position, not way out of position."

A separate Federal Reserve survey of regional economic activity, known as the "beige book," broadly supported the idea that manufacturing held up in late November and December. Most of the Fed's 12 districts reported expansion in the sector, along with positive trends in services. Manufacturers in the Boston district, for example, described prospects for 2007 with words such as "good," "solid" and "decent," though some said business connected to consumer spending and housing deteriorated in late 2006.

Nearly all parts of the country reported persistent weakness in the housing market, but the latest survey from the National Association of Home Builders offered a glimmer of optimism. The association's index of builders' sentiment rose to 35, its highest level since July, while their assessment of future home sales held steady at 49, up from a low of 37 in September. A number below 50 still indicates that negative responses outweighed positive responses.

Meanwhile, the Labor Department's latest report on wholesale prices showed goods-producing businesses, which make up a bit more than a third of the nation's economy, doing a decent job of keeping prices under control.

Driven by a bounce in energy prices, wholesale prices for finished goods rose a seasonally adjusted 0.9% in December from the previous month -- more than what economists had expected. But so-called core wholesale prices, which exclude food and energy, rose a moderate 0.2%. Core prices of intermediate goods, such as components for manufacturing, fell 0.1%, suggesting decreased inflation pressure in the production pipeline. For all of 2006, wholesale prices rose 1.1% overall, while core prices rose 2.0%.

"The trend in core producer-price inflation is encouraging, and mirrors the recent subsiding of inflation pressures observed in consumer prices," wrote Kenneth Beauchemin, U.S. economist at consulting firm Global Insight, in a report. Consumer prices were flat in November. The Labor Department will report on December consumer prices today.

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