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Manufacturing sector regaining some momentum

Ford Assembly workers install a battery onto the chassis of a Ford Focus Electric vehicle at the Michigan Assembly Plant in Wayne, Michigan
Ford Assembly workers install a battery onto the chassis of a Ford Focus Electric vehicle at the Michigan Assembly Plant in Wayne, Michigan

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. factory output surged in August as the pace of motor vehicle assemblies jumped to a six-year high, a hopeful sign for the economy after a slow start to the third quarter.

Although another report on Monday showed a slight pullback in factory activity in New York state this month, businesses were upbeat about the future. In addition, gauges of new orders and shipments in the state jumped, all pointing to a pick-up in manufacturing after a speed bump in the spring.

"Growth in the manufacturing sector is picking up and will run faster over the balance of the year than has been the case in recent months," said John Ryding, chief economist at RDQ Economics in New York.

Manufacturing production advanced 0.7 percent, the Federal Reserve said. The rise, which more than reversed the prior month's 0.4 percent drop, helped to lift overall industrial production 0.4 percent.

Factory output had lagged solid gains in the Institute for Supply Management's index of manufacturing activity.

"The sharp recovery in the ISM since May followed now by this surge in manufacturing output are encouraging signs that the spring soft patch in factory activity is over," said Ted Wieseman, an economist at Morgan Stanley in New York.

In a separate report, the New York Federal Reserve said its Empire State general business conditions index slipped to 6.29 in September from 8.24 last month. A reading above zero indicates expansion.

Economists cautioned against reading too much in the step-back in activity, saying it was not a reliable indicator of national manufacturing.

Even as activity in the state slowed, businesses were confident about the future. The survey's index of six-month business conditions approached a 1-1/2 year high in September, a good sign for business spending.

In addition, a gauge of new orders rose sharply after almost stalling in August and shipments surged to their highest level in more than a year.

ECONOMY EXPANDING STEADILY

The improvement in industrial output last month pointed to some underlying momentum in factory activity, which supports views of only a mild slowdown in economic growth this quarter.

That should keep the Federal Reserve on course to announce cuts to its monthly bond purchases when policymakers meet on Tuesday and Wednesday to assess the economy's health.

"The economy continues to expand at enough of a pace where we are creating jobs and helping to bring down the unemployment rate," said Gus Faucher, senior economist at PNC Financial Services Group in Pittsburgh. "I would not be surprised to see an announcement (on tapering) on Wednesday."

Gains in manufacturing output last month were led by a 5.2 percent rebound in auto assemblies, which had slumped 4.5 percent in July. It was the largest increase since November and it took assemblies to an 11.25 million-unit rate, the highest since June 2007.

There were also increases in the production of consumer goods, high-tech equipment, machinery, aerospace and electrical equipment and appliances, among others.

Utilities output fell for a fifth consecutive month in August, a decline economists blame on a relatively cool summer and difficulties adjusting the series for seasonal fluctuations.

Mining production rose 0.3 percent last month.

The amount of industrial capacity in use edged up to 77.8 percent from 77.6 percent in July. Capacity use, which can indicate how much factories can ramp up production before economic growth becomes inflationary, is still 2.4 percentage points below its long-run average.

"There is no evidence of any inflation pressure at this point in the production cycle," said Joseph LaVorgna, chief economist at Deutsche Bank Securities in New York.

(Reporting by Lucia Mutikani; Additional reporting by Steven C Johnson and Richard Leong in New York; Editing by Andrea Ricci)

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