US industrial production fell sharply in April and two separate regional studies did little to dispel the gloom surrounding the manufacturing sector as businesses continued to struggle with waning domestic demand.
Industrial output dropped 0.7 per cent last month, more than twice the rate forecast by economists, reflecting a fall-off in motor vehicle demand and problems related to strike action at an auto-parts supplier.
Total manufacturing output slumped by 0.8 per cent, the biggest monthly decline in more than two years. Production of business equipment fell 1.1 per cent which economists said did not augur well for future business investment.
Capacity utilisation - the operating rate of US factories - fell 0.7 percentage points to 79.7 per cent, the first time this measure has dipped below 80 since the continuing disruption after Hurricane Katrina in October 2005.
“With expectations of reduced consumer & business capital spending, industrial production should continue to trend lower in coming months,” Sam Bullard, economist at Wachovia, said.
Manufacturing had been expected to withstand the current economic headwinds better than other sectors, in part because the weaker US dollar has provided a boon for exporters, making their products cheaper to foreign buyers and helping to narrow the US trade deficit.
However, US producers are also dealing with a slowdown in domestic demand which has led many to lay off workers in expectation of a worsening economic environment.
A gauge of manufacturing activity in the Philadelphia region remained in contraction this month, but the index improved from -24.9 to -15.6, the highest reading in five months. New orders rose from -18.8 to -3.7 while the current shipments and employment indices also registered significant improvements.
However, the partial recovery in the Philly Fed index was offset by renewed weakness in the New York area.
The Empire State index deteriorated this month to -3.23 from 0.63 in April. Although the indicator drifted back into negative territory it remained significantly higher than a record low of -22.23 set in March.
“Today’s batch of manufacturing reports are calling into question the ability of the export boom to sustain activity in the face of the material slowing in domestic demand,” Sheryl King, economist at Merrill Lynch, said.
First-time jobless claims rose by 6,000 to 371,000 in the latest week while the number of US workers remaining on unemployment benefits rose by 28,000 to 3,060,000.
The latter reading marked the third consecutive week that continuing claims have trended above 3m, which some economists see a recessionary level.
“All in all, this still feels like neither the labour market data or the manufacturing sector have quite made it into recession terrain, and are still lurking in the region associated with negligible but positive growth,” Alan Ruskin, strategist at RBS Global Markets, said.
Meanwhile, US home builder sentiment fell in May for the first time in fourth months, a report by the National Association of Home Builders revealed on Thursday.
The NAHB/Wells Fargo housing market Index slipped from 20 to 19 this month, just shy of December’s record low of 18.
“Though not conclusive, this is symptomatic of the structural excess supply in this sector that we think will take a long time to work out,” Jan Hatzius, chief US economist at Goldman Sachs, said.
The report came as lawmakers continued to negotiate the details of bipartisan legislation which would use public money to guarantee billions of dollars of refinanced mortgages in an attempt to prop up the ailing US housing market.
