story by Michelle Jamrisko and Shobhana Chandra
Manufacturers are turning out more cars and computers, homebuilders are gaining confidence and prices are little changed, showing the U.S. economy is expanding with inflation contained.
Production at factories, mines and utilities increased 0.6% in July following a 0.1% gain the prior month, Federal Reserve data showed today (Aug. 15) in Washington. The cost of living over the past 12 months rose at the slowest pace in almost two years and sentiment among residential construction companies climbed to a five-year high, according to other data.
The reports ease concern the debt crisis that has dragged Europe to the brink of a recession and slowing demand in Asia will bring an end to the U.S. recovery that began in June 2009. At the same time, a lack of pricing power makes it possible for Fed policy makers to take whatever additional steps are needed to ensure the expansion is sustained.
“Manufacturing is still moving in the right direction,” said Michael Carey, chief economist for North America at Credit Agricole CIB in New York. “Domestic demand has been holding up, and there are some areas that continue to do well, such as autos,” said Carey, who accurately predicted the gain in output. “Inflation is well under control and not something the Fed is worried about.”
The U.S. consumer-price index was unchanged in July, less than the median forecast of 85 economists surveyed by Bloomberg, which called for an increase of 0.2%. The cost of living climbed 1.4% over the past 12 months, the smallest year- to-year increase since November 2010, the Labor Department reported.
The core index, which excludes volatile food and fuel costs, rose 0.1% last month, also less than forecast. Declining prices for a broad-range of goods and services, including hotel rates, airline fares and new and used cars helped offset rising costs for medical care and rents, the report showed.
“The fact that the economy was so weak in the first half of the year means there’s probably less pricing power,” said Omair Sharif, U.S. economist at RBS Securities Inc. in Stamford, Conn. “It’s going to be tough to push prices through to the consumer who’s already very weak and shown an appetite for discount shopping,” said Sharif, who correctly forecast the increase in core prices.
Dick’s Sporting Goods Inc. is among companies having mixed success in boosting prices, getting customers to pay more for some items and having to pull back on others.
“Some of them worked out fine and the customer accepted them and some other ones didn’t,” Edward Stack, chairman and CEO of the Coraopolis, Pa.-based retailer, said on an Aug. 14 earnings call.
Homebuilders such as PulteGroup Inc. are gaining confidence as less expensive properties and record-low mortgage rates entice buyers.
The National Association of Home Builders/Wells Fargo confidence index rose to 37, higher than projected and the best showing since February 2007, figures from the Washington-based group showed. Readings below 50 mean more respondents said conditions were poor.
“The outlook appears to be brightening,” Barry Rutenberg, chairman of the NAHB and a builder from Gainesville, Fla., said in a statement. At the same time, “there is still much room for improvement.”
The production report showed factories are holding up. Manufacturing, which makes up about 75% of total output, rose 0.5% in July for a second month.
The Fed’s figures showed motor vehicle output increased 3.3% in July after a 1.9% increase the month before. Computer and electronics makers produced 1.5% more.
“The auto industry is probably responding to something they didn’t expect when the year started, and that was a pretty impressive bounce-back in demand,” said David Resler, chief economic adviser at Nomura Securities International Inc.
The report also showed utility production increased 1.3% after slumping 3.3% in June as Americans tried to cool their homes. July was the hottest month in the lower 48 states in records going back to 1895, according to the National Oceanic and Atmospheric Administration.
Not all the data was positive. A report from the Federal Reserve Bank of New York showed manufacturing in the region unexpectedly contracted this month. The so-called Empire State Index fell to minus 5.9 in August from 7.4 last month. Readings less than zero signal contraction in the measure that covers New York, northern New Jersey and southern Connecticut.
Deere & Co., the largest maker of farm equipment, today posted fiscal third-quarter profit that trailed analysts’ estimates and cut its full-year earnings forecast after global demand slowed. Equipment sales rose 16% from a year ago, compared with the 25 percent increase Deere forecast in May.