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Cold weather slams U.S. factory output, spurs growth fears

Steel coils at the ThyssenKrupp Steel USA factory are pictured in Calvert, Alabama November 22, 2013. REUTERS/Lyle Ratliff
Steel coils at the ThyssenKrupp Steel USA factory are pictured in Calvert, Alabama November 22, 2013. REUTERS/Lyle Ratliff

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. manufacturing output unexpectedly fell in January, recording its biggest drop in more than 4-1/2 years, as cold weather disrupted production in the latest indication the economy got off to a weak start this year.

Though consumer sentiment was steady in early February, there are worries the persistent and widespread harsh weather could dampen the morale of households, whose budgets are being stretched by soaring heating bills.

"The big question is whether the U.S. economy is slowing significantly or whether it is merely going through a soft patch caused by extreme weather. The evidence points to the latter," said Chris Williamson, chief economist at Markit in London.

Factory production fell 0.8 percent last month, the Federal Reserve said on Friday. It was the first drop since July and the biggest since May 2009, when the economy was still locked in recession. Output had increased 0.3 percent in December.

The Fed said "severe weather ... curtailed production in some regions of the country." Economists polled by Reuters had expected manufacturing output to edge up 0.1 percent.

A separate report showed the Thomson Reuters/University of Michigan index of consumer sentiment stood at 81.2 early this month, unchanged from January. The survey's barometer of current economic conditions fell to 94.0 from 96.8 in January.

"The good news is that confidence proved resilient to recent government reports of weak growth in income and employment," survey director Richard Curtin said.

"The not-so-good news is that the full impact on household budgets from the harsh winter has yet to be registered."

Manufacturing joined weak retail sales and employment data in suggesting that cold weather had spurred a step-back in economic growth early in the first quarter after a strong performance in the second half of 2013.

With unusually low temperatures and disruptive snow storms extending into February, the run of downbeat economic reports is likely to persist and further cloud the growth picture.

Given the weather's role in the slowdown, economists say the Fed will likely discount the reports and continue with measured reductions in its monetary stimulus. It has reduced its monthly bond buying to $65 billion from $85 billion in two steps since its December policy meeting.

"We expect a more buoyant performance in the spring as the economy rebounds from the winter chill," said Millan Mulraine, deputy chief economist at TD Securities in New York.

"This is largely consistent with the Fed's view that the current slowdown will prove transitory, and should have no direct impact on its tapering agenda in the near term."

BROAD-BASED WEAKNESS

Investors on Wall Street shrugged of the manufacturing report. U.S. stocks were trading higher, with the Standard & Poor's 500 index on track for its first two-week winning streak of the year. Prices for U.S. Treasury debt fell and the dollar slipped against a basket of currencies.

The weakness in factory output last month was broad-based, with the production of motor vehicles and parts tumbling 5.0 percent, the largest drop since August 2010, after ticking up 0.1 percent in December.

"The inclement weather in January contributed to some of these decreases. Numerous motor vehicle assembly facilities lost one or more days of production during the month," the Fed said.

Apart from the poor weather, auto manufacturers are also likely cutting back on production because of a sharp increase in motor vehicle inventories in the fourth quarter. That situation has been exacerbated by a fall in sales in December and January.

While manufacturing output accelerated in the fourth quarter, the pace was not as strong as previously thought. Fourth-quarter output at the nation's factories was lowered to a 4.6 percent annual rate from a 6.2 percent pace.

"This may be an early sign demand was already slowing even before 2014 began," said Jay Morelock, an economist at FTN Financial in New York.

The drop in factory output last month and a 0.9 percent fall in mining activity weighed on overall industrial production, which fell 0.3 percent, the biggest drop since April.

Mining output was also hampered by cold weather, which caused slowdowns at some oil and gas extraction facilities.

But freezing temperatures boosted demand for heating last month, causing utilities production to jump 4.1 percent.

With production declining, the amount of industrial capacity in use fell 0.4 percentage point to 78.5 percent January.

(Reporting By Lucia Mutikani, additional reporting by Steven C Johnson in New York; Editing by Paul Simao)

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