Production in U.S. Climbs, Signaling Investment Gain

Industrial production unexpectedly rose in February as growing demand for computers and communications gear overcame a drop in autos, pointing to a pickup in U.S. business spending.

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Production at factories, mines and utilities climbed 0.1 percent, the eighth consecutive increase, figures from the Federal Reserve showed today. Manufacturing output declined 0.2 percent, depressed by bad weather and a slump in autos that may reflect the fallout from recalls at Toyota Motor Corp.

Manufacturers will probably make up for the weather disruptions this month as companies strive to stabilize inventories and exports climb. The report also showed factories had plenty of spare capacity, one reason analysts anticipate Fed policy makers meeting tomorrow will reiterate a pledge to keep interest rates low to sustain the economic expansion.

“We continue to see signs of strengthening industrial and manufacturing activity and we look for this recovery to continue through all of 2010,” said John Herrmann, senior macro strategist at State Street Global Markets in Boston. “We expect to see both inventory growth and business capital spending growth, with the second quarter looking to be potentially the strongest.”

Economists forecast industrial production would be unchanged after increasing 0.9 percent the prior month, according to the median of 60 projections in a Bloomberg News survey. Estimates in the survey ranged from gains of 0.5 percent to a 0.7 percent decline.

Empire State

Another report today showed manufacturing in the New York region expanded in March for an eighth consecutive month, boosting factory payrolls. The Fed Bank of New York’s Empire State index decreased to 22.9 from 24.9 in February. Figures greater than zero signal growth. The bank’s employment gauge climbed to the highest level since October 2007.

Stocks declined on growing concern that China and India will slow their economies to curb inflation. The Standard & Poor’s 500 Index fell 0.3 percent to 1,146.99 at 9:36 a.m. in New York. Treasury securities were little changed.

Capacity utilization, or the proportion of plants in use, climbed to 72.7 percent from 72.5 percent, today’s Fed production report showed. The gauge averaged 80 percent over the past two decades and suggests inflation will remain low.

Slowed by Storms

The manufacturing rebound may have paused last month as factories grappled with the storms that pushed seasonal snowfall counts to records in parts of the eastern U.S. “Production was likely held down somewhat by winter storms in the Northeast,” the Fed said in the release.

Utility output increased 0.5 percent, while mining output, which includes oil drilling, increased 2 percent.

Production of business equipment increased 0.4 percent, a third consecutive gain, as demand for computers, communications gear and semiconductors climbed, a sign business investment is picking up.

Spending on equipment and software increased at an 18 percent annual rate in the fourth quarter, the most since 2000, the Commerce Department said Feb. 26. Companies are upgrading their forecasts for sales growth.

Deere & Co., the world’s largest maker of farm machinery, posted first-quarter profit that topped analysts’ estimates and raised its 2010 forecast as projections improved for agricultural-equipment sales in the U.S. and Canada.

Chief Executive Officer Samuel Allen said Feb. 17 that full-year equipment revenue will increase as much as 8 percent. Industrywide, farm machinery sales in the U.S. and Canada are expected to be about the same as last year, an improvement from a November projection of a 10 percent decline in the region.

Recalls, Weather

Motor vehicle and parts production declined 4.4 percent in February following a 5.2 percent increase the prior month. Toyota sales fell 8.7 percent from a year earlier as it struggled with global recalls that halted demand for some models, industry figures showed this month.

The weather may have also played a role. Chrysler Group LLC, the U.S. automaker run by Fiat SpA, said it suspended production for part of the third week of February at assembly plants in Michigan and Illinois because of parts shortages, said Jodi Tinson, a Chrysler spokeswoman, on Feb. 16. She confirmed the stoppage at the Warren, Michigan, pickup-truck factory was related to inclement weather.

“We don’t expect any loss of production,” Tinson said. “We’ll find ways to make it up as we go.”

Excluding automobiles, factory output climbed 0.1 percent last month after increasing 0.7 percent in January.

Manufacturers, which make up about 12 percent of the economy, will probably continue to lead the recovery as business spending on equipment picks up and expanding global economies boost demand from overseas.

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