Factory rebound likely if U.S. fiscal impasse resolved

story by Shobhana Chandra and Michelle Jamrisko
Bloomberg News

Manufacturing in the New York region shrank for a fifth straight month in December, while an increase in optimism about the next six months signals factories are poised to rebound should the federal government resolve its impasse over fiscal policy.

The Federal Reserve Bank of New York’s general economic index dropped to minus 8.1 from minus 5.2 in November. Economists monitor the gauge and other regional releases for clues about the direction of U.S. manufacturing. Readings of less than zero signal contraction in New York, northern New Jersey and southern Connecticut.

Companies from Verizon Communications Inc. to Rockwell Collins Inc. have said they don’t plan to boost investment amid concern lawmakers will not avert more than $600 billion in tax increases and budget cuts slated to take effect in 2013. Nonetheless, growing optimism about the outlook indicates manufacturers are looking beyond the short term as housing improves and consumer spending climbs.

“The biggest challenge for manufacturing is lack of confidence due to uncertainty in fiscal policy,” said Tom Simons, an economist at Jefferies Group Inc. in New York, who projected a reading of minus 5 for the gauge. “That is slowing down activity. There are reasons for manufacturing to come back but it’s going to be a couple of months before we start to see the acceleration.”

The median forecast of 55 economists in a Bloomberg survey called for minus 1. Bloomberg survey estimates for the December figure ranged from minus 10 to 8.5. Manufacturing makes up 12% of the U.S. economy and about 6% of the New York economy.

In a supplemental question from the Fed, area factory managers were asked about superstorm Sandy’s effect on revenue. Respondents in New York said they anticipated no effect on this month’s sales from the storm.

The Empire State gauge of new orders decreased to minus 3.7 from 3.1 in November. It was the fifth month in the last six showing contraction. A measure of shipments dropped to 8.8 from 14.6.

Verizon, the second-largest U.S. phone company, said on Oct. 18 that spending for the first nine months of the year declined by more than $1 billion from the year-earlier period. Chief Financial Officer Francis Shammo said last month at a conference the number probably won’t rise in 2013.

Executives are delaying new contracts and investment decisions due to “the pending fiscal cliff, potential tax reform and other policy changes that may take place,” Shammo said on a call with analysts on Oct. 18 from New York.

The measure of factory employment in the New York region climbed to minus 9.7 from minus 14.6 in November. The index of prices paid climbed to 16.1 from 14.6, while prices received fell to 1.1 from 5.6.

Factory executives in the New York Fed’s district were more optimistic about the future. The gauge measuring the outlook six months from now climbed to 18.7 from 12.9.

Economists monitor the New York report and Philadelphia Fed factory readings, due Dec. 20, for an indication about the Institute for Supply Management figures on U.S. manufacturing, set for release Jan. 2.

Output at factories, mines and utilities increased 1.1% last month, the biggest gain in two years, the Fed reported last week. Manufacturing, about 75% of production, surged 1.1% in November, the most this year.

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Companies such as Lakeland Industries Inc., a Ronkonkoma, N.Y.-based maker of protective work clothing, are seeing domestic as well as overseas firms holding back on spending as American lawmakers debate how best to reduce the deficit and avert about $600 billion in tax increases and budget cuts at the start of 2013.

“We do see the U.S. economy slowing down because of this fiscal cliff dilemma,” Christopher J. Ryan, president and chief executive officer of Lakeland Industries, said on a Dec. 13 conference call. “A lot of people are not spending money, they’re sitting back waiting for resolution in Washington. And when I talk to some of the international markets they’re doing the same thing. They’re all sitting on their hands waiting for the U.S. Congress to do something.”

Some manufacturers indicated that a new bout of global economic weakness would have to emerge before they pursue additional cost-cutting.

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