Manufacturing, housing sectors exhibit diverging fortunes

By Neil Irwin
Washington Post Staff Writer
Wednesday, August 18, 2010

A new round of economic data Tuesday confirms an emerging pattern: The nation's manufacturing sector is looking reasonably solid, while housing is dipping into a new downturn.

Industrial production rose 1 percent last month, the Federal Reserve said, twice as much as expected and a reflection of strong production of automobiles and other big-ticket products. That suggests that the recovery in the industrial sector continued solidly as the second half of the year got underway, helping to assuage fears that it would lose momentum as businesses complete a cycle of rebuilding their inventories.

Some recent surveys have shown a leveling off of manufacturing activity in recent months, as demand from consumers rises very slowly. But in general, the factory sector has been a bright segment of the economic landscape this year, adding jobs steadily after a devastating 2008 and 2009.

Manufacturing output, a component of overall industrial production, rose 1.1 percent last month, and the rise in overall output was enough to push capacity utilization to 74.8 percent, the highest since October 2008.

More gloomy was a Commerce Department report on the housing market. The 1.7 percent rise in housing starts last month was below expectations and driven largely by a rise in construction of multi-family homes, such as apartment buildings, which fluctuates widely. Construction starts on single-family homes fell 4.2 percent. Also disappointing was a revision of June data to indicate a much steeper decline that month than earlier reported.

The data are only the latest evidence that the housing market is losing strength. Since the end of a homebuyers tax credit -- it applied to home-purchase contracts signed before April 30 -- both home sales and construction activity have been shrinking rapidly, despite record-low mortgage rates.

"What we're seeing is the second leg down in housing construction," said Michelle Meyer, a senior U.S. economist at Bank of America Merrill Lynch. "Unlike in other recoveries, housing is not going to help us at all. It is indicative of a deterioration of sentiment in the economy. We're seeing consumers worried about future job prospects, and credit is still quite tight."

The diverging fortunes of the industrial and housing sectors reflect a combination of factors, most notably the excesses of housing construction during the mid-2000s that continue to hang over the residential real estate market.

"The contrast is interesting," said Jerry Webman, chief economist at OppenheimerFunds. "Businesses, and particularly large businesses that make stuff, have cut expenses and are ready to produce again, and some even have demand backlogs."

"With housing, on the other hand, with more supply than demand out there it's quite sensible that homebuilders would be reluctant to produce a lot more units," Webman said.

Also Tuesday, the Labor Department released new data on wholesale inflation that showed an 0.2 percent increase last month, in line with expectations.

In normal times, economists hope to see low inflation levels. But with the economy weak and growing fears of deflation -- a dangerous cycle of falling prices -- somewhat higher inflation is more welcome now.

The July report on the producer price index delivered that. Apart from the increase in overall prices, the index rose 0.3 percent when volatile food and energy are excluded. And over the past year, wholesale prices excluding food and energy rose 1.5 percent, up from 1.1 percent in the year ended in June.

Those numbers helped to reduce fears that prices will start falling, a situation that can become entrenched and cause long stretches of economic underperformance, as happened in Japan in the past 20 years and the United States in the 1930s.

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