Production, Home Starts Probably Climbed: U.S. Economy Preview

The manufacturing rebound probably accelerated in January and homebuilding bounced back, adding to evidence the U.S. expansion began the new year without missing a beat, economists said before report this week.

Production climbed 0.8 percent last month, the biggest gain since August, according to the median estimate of 65 economists surveyed by Bloomberg News ahead of a Federal Reserve report Feb. 17. Builders may have broken ground on 580,000 houses at an annual pace, up 4.1 percent from December when colder-than- average temperatures depressed construction.

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“The upswing in manufacturing is gaining traction,” said John Herrmann, chief economist at Herrmann Forecasting in Summit, New Jersey. “We’re seeing extremely strong export demand, an inventory cycle that is lifting output and replacement of high-tech products.”

Gains in spending on new equipment will probably be sustained this year as companies aim to edge out the competition and take advantage of the strengthening economy. Combined with growing demand from overseas and efforts to replenish stockpiles following the biggest reduction on record may ensure that factories will keep expanding and hiring in coming months.

Cisco Systems Inc., the biggest maker of networking equipment, is among companies planning to hire. The San Jose, California-based firm this month predicted sales will accelerate and said it will boost its workforce by as much as 3,000 as customers resume spending to deal with surging data traffic.

‘Better’ Momentum

“Almost every country is saying their momentum is better than it was before, and almost every business is saying it’s more optimistic,” Chief Executive Officer John Chambers, 60, said in a Feb. 4 interview. “It shows a capital spending trend that’s hard to deny, on a global basis.”

Eaton Corp., the maker of hydraulics and automotive valves, is seeing demand increase in its auto and trucks unit, as is typical early in an economic cycle, Chief Executive Officer Sandy Cutler said last week in an interview from company headquarters in Cleveland.

The company forecasts it will capture about $1 billion in stimulus funds as the federal government rebuilds housing on military bases and aims to improve efficiency in federal buildings. The Obama administration’s $787 billion stimulus program is boosting infrastructure and green energy spending, and the government says it has funded as many as 2 million jobs.

The Standard & Poor’s Supercomposite Machinery Index, which includes companies such as Eaton and Caterpillar Inc., has dropped 1.4 percent so far this year, outperforming the broader S&P 500 Index, which is down 3.6 percent.

Factory Surveys

Private surveys have also signaled manufacturing is recovering. The Institute for Supply Management’s factory index in January showed the fastest pace of expansion since 2004.

Efforts to stabilize inventories accounted for 3.4 percentage points of the fourth quarter’s 5.7 percent pace of economic growth, according to figures from the Commerce Department.

Factories are also benefiting from rising exports as global demand recovers after the worst slump since World War II ended. A 10 percent drop in the value of the dollar from a four-year high on March 3 against its major trading partners is making American goods more competitive. Exports have risen for eight consecutive months since reaching a three-year low in April.

A report from the Commerce Department on Feb. 17 may show housing starts rose last month after dropping 4 percent in December. The extension in November of a first-time buyers’ tax credit and its expansion to include current homeowners may push housing demand up in the first half of the year.

Improving Outlook

In a sign the recovery has staying power, the Conference Board’s index of leading economic indicators for January may show a gain of 0.5 percent, according to the median estimate of economists surveyed before the Feb. 18 report. It would be the 10th consecutive increase in the gauge of the economy’s performance over the next three to six months.

Reflecting slowing job losses, the Labor Department may report on Feb. 18 that initial jobless claims last week fell to 430,000, the fewest since July 2008, from 440,000 the prior week, according to forecasts.

Consumer prices, due Feb. 19, may show the cost of living rose 0.3 percent in January, according to the median of economists’ forecasts, following a 0.1 percent gain the prior month. Excluding food and fuel, prices probably rose 0.1 percent for a second month, the Labor Department’s report may show.

Wholesale prices, due Feb. 18, probably rose 0.8 percent, while prices paid for imported goods, released the day before, may have increased 1 percent, according to the median estimate of economists surveyed.

Reports from the New York Fed on Feb. 16 and the Philadelphia Fed two days later may show factories in those regions expanded at a faster pace this month, according to economists surveyed.

Finally, the Fed on Feb. 17 will release the minutes of its Jan. 27 monetary policy meeting.

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