Manufacturing Slips, but Fed Finds Stability in Some Parts of U.S.
Thursday, April 16, 2009
Declining demand pulled down manufacturing output in March, but the recession showed signs of leveling out in parts of the country and falling energy prices put more money into consumers' pockets, according to government data released yesterday.
Industrial production dropped 1.5 percent last month, the Federal Reserve said, as factories curbed their output of appliances, furniture and other goods to get their operations in line with reduced demand. The amount of production capacity manufacturers used fell to its lowest level since the government began publishing such data in 1967.
But there were encouraging signs for the economy, as well. In its "beige book" survey, the Fed said five of its 12 district banks "noted a moderation in the pace of decline" in the economy, and several of them "saw signs that activity in some sectors was stabilizing at a low level."
The report spurred a rally in financial markets, which had been languishing most of the day. The Dow Jones industrial average rose 109.44 points, or 1.4 percent, to 8029.62. The broader Standard & Poor's 500-stock index rose 10.56 points, or 1.3 percent, to 852.06.
Nearly every sector of the economy has been pummeled since the recession began in December 2007. Retailers, whose sales unexpectedly fell in March after showing some hopeful signs earlier this year, are working through their inventory backlog and have reduced their factory orders, analysts said.
As a result, manufacturing output for the first quarter fell at an annualized rate of 20 percent, the largest drop since 1975.
"This is a very severe production decline," said Nigel Gault, chief U.S. economist for IHS Global Insight. "Everybody is being hit very hard."
The "beige book," based on phone calls with businesses around the country, is published two weeks before each meeting of Fed policymakers to help inform such decisions as setting interest rates.
The survey found that in some industries, the economy continued to deteriorate: Orders and shipments of paper, automobiles, wood products and electrical machinery across the country were down. Business travel was off, with officials in the Atlanta district reporting convention cancellations. In Washington, activity in the real estate market continued to decrease and asking rents declined.
But demand remained strong at pharmaceutical companies in the Chicago district and petrochemical producers in the Dallas district. Moreover, a modest improvement in home sales was seen in the Atlanta, Minneapolis, San Francisco and Kansas City regions.
In a separate sign of hope for the housing sector, an index of homebuilders' confidence yesterday had its biggest increase in five years. The index remains unusually low by historical standards, but analysts said the government's efforts to lower interest rates and provide other incentives to buyers may be helping.
President Obama's "program on mortgages seems to be kicking in and stabilizing the situation," said Douglas S. Roberts, chief investment strategist for ChannelCapitalResearch.com.
Along with signs of an end to the plunge in housing, there are indications that prices across the economy are no longer in danger of falling off a cliff. For months, some economists have been concerned about deflation, a dangerous spiral in which falling prices weaken the economy further.
The consumer price index fell 0.1 percent in March and is down 0.4 percent since April 2008, its first 12-month decline since August 1955. But excluding fuel and food, it actually rose 0.2 percent last month and 1.8 percent over 12 months, helping to dispel deflation concerns.
"We do not see problematic deflation taking hold," said Mark Vitner, senior economist at Wachovia Economics Group. "Lower prices are good for the consumer."
Staff writer Renae Merle contributed to this report.