Sun, Jun 17, 2012 - Page 11 News List

Weak factories signal US recovery unstable

GRIM OUTLOOK:US manufacturing has been helping the economy bear the brunt of the eurozone crisis, but now several reports show industrial output has dropped

Reuters, Washington

US factory output contracted last month for the second time in three months and families took a dimmer view of their economic prospects early this month, signs that the US economy’s recovery is on shaky ground.

Data released on Friday was the latest in a series of weak economic reports that have led analysts to cut growth forecasts while raising expectations the US Federal Reserve could launch new stimulus measures.

Until recently, manufacturing had been a buttress for the US economy, helping it resist headwinds from Europe’s debt crisis.

However, last month, factory output shrank 0.4 percent, with US plants producing fewer cars and less machinery, Federal Reserve data showed.

“It’s more convincing evidence that the economy is stuck in low gear,” said Joe Manimbo, a market analyst at Travelex Global Business Payments.

Other reports pointed to cooling factory activity in New York state this month, along with a drop in household confidence in the economy.

The fall in confidence poses a serious threat to US President Barack Obama’s chances of winning re-election in November. It could also lead consumers to cut back on spending, which would reduce economic growth.

“Consumers are scared,” said Sharon Stark, managing director at Sterne Agee in Birmingham, Alabama.

US consumer sentiment fell to a six-month low earlier this month. A gauge of household confidence in the economy’s future also dropped to its lowest since December.

The Thomson Reuters/University of Michigan’s index on consumer sentiment slipped to 74.1, falling short of even the most pessimistic forecast in a Reuters poll.

While manufacturing is an anchor of the economy, consumer spending is its foundation, accounting for about two-thirds of GDP.

Economists at Capital Economics said that the drop in consumer sentiment is consistent with growth in consumer spending slowing to a mere 1 percent annual rate in the second quarter, down from 2.7 percent in the first three months of the year.

The slackening US recovery and a worsening debt crisis in Europe have bolstered expectations of a further easing of monetary policy by the Fed, although economists are divided on whether the central bank will act when it meets on Tuesday and Wednesday. In spite of this lack of consensus, US stocks rose, ending the week higher on hopes of collective action from global central banks if today’s election in Greece results in market turmoil.

Hiring by US employers has slowed for four straight months, while retail sales contracted last month and new applications for jobless benefits have risen in five of the last six weeks.

Within the Fed’s report on US industry last month, the softness in the factory sector was widespread.

Output for durable — or long-lasting — goods dropped 0.5 percent as auto production slid 1.5 percent. Production of nondurables fell 0.2 percent.

Total industrial output, covering factories, mines and utilities, declined 0.1 percent. Analysts polled by Reuters had expected industrial production to rise 0.1 percent.

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