Economic recovery gains momentum

By Courtney Schlisserman and Timothy R. Homan
Thursday, December 16, 2010

Industrial production in the United States increased more than forecast last month and consumer prices slowed, indicating that the recovery is gaining momentum without generating inflation.

Output at factories, mines and utilities rose 0.4 percent, the biggest gain since July, after a revised 0.2 percent drop in October, according to a Federal Reserve report released Wednesday. The consumer price index climbed 0.1 percent in November after a 0.2 percent gain in October, the Labor Department said.

Assembly lines are speeding up as business investment and exports grow and consumer spending accelerates, helping to buoy an expansion that Fed policymakers said Tuesday isn't strong enough to reduce a jobless rate hovering near 10 percent. Price increases that are below central bankers' target levels will boost the case to maintain the Fed's purchases of $600 billion in securities through June to stimulate growth.

"The manufacturing sector continues to heal itself," said John Herrmann, a senior fixed-income strategist at State Street Global Markets. "The outlook for business spending on equipment and software remains very positive." Fed Chairman Ben S. Bernanke "is unlikely to withdraw accommodation until he sees a clear upward turning point in core inflation and a downward turn in unemployment."

Stocks dropped slightly Wednesday, however, as shares were dragged down by investors' concerns about government debt levels in the United States and Europe. The Standard & Poor's 500-stock index fell 0.5 percent, to 1235.23.

"People are concerned about higher borrowing costs even as the Fed tries to keep interest rates low," said Eric Teal, chief investment officer at First Citizens Bancshares. "There's also heightened concern about Europe."

Factory production increased 0.3 percent for a second month, the Fed's report showed, led by a 0.9 percent increase in business equipment, including computers, communications equipment and semiconductors.

Rising international demand and the need to replace aging equipment is a boon to manufacturers. Exports rose to a two-year high in October, according to Commerce Department figures released last week. Business spending on equipment and software advanced at a 17 percent annual rate in the third quarter.

Broadcom, the biggest maker of chips for TV set-top boxes, on Tuesday increased its fourth-quarter revenue projection to about $1.9 billion. The company is making inroads in the mobile phone market, supplying radio chips for handsets from South Korea's Samsung Electronics and Finland's Nokia Oyj.

"We have seen now an extended period of time of recovery in the components business," said Paul Reilly, chief financial officer of Arrow Electronics, a distributor of electronic components and computer products to industrial customers.

Carmakers decreased output by 6 percent last month, the first drop since August, even as demand climbed, indicating that production may rebound in coming months. Factory output excluding motor vehicles, rose 0.7 percent in November, the biggest gain since May.

Nationwide, capacity utilization, which measures the amount of a plant in use, increased to 75.2 percent last month, the highest level since October 2008. The gauge averaged 80 percent over the past 20 years, signaling that there's enough spare equipment to prevent bottlenecks that would lead prices higher.

"We're very far from getting close to stretching industrial capacity," said Michael Feroli, chief U.S. economist at J.P. Morgan Securities.

The consumer price index, which was up 0.1 percent in November, rose less than the 0.2 percent median estimate of economists surveyed by Bloomberg. The "core" measure, which excludes more volatile food and energy costs, also rose 0.1 percent, matching the median forecast.

Retailers that are cutting prices are drumming up demand, but those not discounting enough are struggling. Best Buy, the world's largest consumer electronics retailer, slashed its annual profit forecast Tuesday amid increasing competition from Wal-Mart Stores and Target.

Best Buy lost TV sales in the third quarter to "the large discounters" that promoted the least expensive models, chief executive Brian Dunn said during a conference call with analysts.

- Bloomberg News

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