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Economic Watch: Weaker Numbers for Manufacturing, Housing

April 18, 2017

By Evan Lockridge

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A measure of industrial production in the U.S. moved higher despite an easing in manufacturing, while the housing market also gave up some recent gains, according to reports issued Tuesday. Both reports follow recent moderate to impressive gains.

The total output from the nation’s factories, mines and utilities moved 0.5% higher in March after moving up 0.1% in February, according to the Federal Reserve. The performance was in line with Wall Street expectations.

The increase in March was more than accounted for by a jump of 8.6% in the output of utilities, the largest in the history of the index, as the demand for heating returned to seasonal norms after being suppressed by unusually warm weather in February. The production at mines edged up 0.1%.

Manufacturing output, which more directly affects truck freight, fell 0.4% in March, led by a large step-down in the production of motor vehicles and parts. Factory output aside from motor vehicles and parts slipped 0.2%. Despite the decline, manufacturing output in March was up 0.8% from the same time in 2016.

The March drop in factory output followed gains in January and February that are now reported to be smaller than stated earlier. The decline in the manufacturing index in March was its first loss since August 2016, however, factory output increased at an annual rate of 2.7% in the first quarter.

For the first quarter as a whole, industrial production rose at an annual rate of 1.5%.

At 104.1% of its 2012 average, total industrial production in March was 1.5% above its year-earlier level.

“A weather-related surge in utility output masks what is otherwise a weak industrial production report for March,” said analysts at Econoday. “Manufacturing… [which] represents the vast core of this report… points to a quarter-end fizzle for a factory sector where unusually strong readings in sentiment reports have not panned out to strength in definitive data like today's report. Hopefully the March weakness will be reversed in force during the spring.”

Analysts at Wells Fargo Securities said while Tuesday'ss industrial production figures and latest PMI readings from the ISM and Empire State Manufacturing Survey suggest some cooling, it still looks for manufacturing output to expand in the coming months.

"The export environment for U.S. producers has improved with a pickup in global growth and relatively stable value of the dollar, at least compared to 2014- 2015, while rising profits and wage pressures should help to revive business investment," said Tim Quinlan, senior economist

New Home Starts Decline as Building Permits Increase

In the housing sector, a Commerce Department report showed homebuilding fell more than expected last month but the number of permits issued for construction moved higher.

Housing starts dropped 6.8% in March from the month before to a annual rate of 1.22 million units, slightly less than Wall Street expectations, while the February level was revised slightly higher. Despite the decline, the March level is 9.2% better than the same time a year ago.

Single-family homebuilding, the biggest share of the market, fell 6.2% after hitting a more than nine-year high the month before, while multi-family home starts fell 7.9%.

However, the number of building permits issued, an indicator of future construction, rose 3.6% in March, led by a 13.8% surge in the multi-family sector. The number of permits issued in March jumped 17% from March 2016.

U.S. housing activity continues to trend higher, although as the latest data show, the pattern isn’t always smooth, according to Josh Nye, economist at RBC Economics Research.

“For the first quarter as a whole, starts edged up to a fresh cycle high,” he said. “Other housing data have also improved early this year. Home resales are rising and multi-unit construction spending has increased strongly quarter-to-date – supporting our forecast for a 10% annualized increase in first quarter residential investment.”

Nye said this will provide a key offset to a slowdown in consumer spending that is expected to limit GDP growth to a 1.5% annual rate in the quarter.

“While consumers are expected to re-emerge as the main source of growth going forward, residential investment is forecast to continue to make a solid contribution to economic activity, as many of the factors that support consumer spending, particularly strong labour market conditions and buoyant confidence, should also boost demand for housing,” he said.

Nye believes while some choppiness can be expected, housing starts will continue to move higher throughout 2017 to extend the upward trend that has been in place since 2011.

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