U.S. factory output solid in September; builder sentiment slumps further
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[October 19, 2022]
By Dan Burns
(Reuters) - Production at U.S. factories
rose in September led by output gains in both durable and nondurable
goods, indicating the manufacturing sector remains on reasonable footing
despite the Federal Reserve's efforts to hamper demand - and lower
inflation - through higher interest rates.
But the Fed's aggressive rate hike campaign has delivered another blow
to the housing sector, with market sentiment among U.S. home builders
sliding for the 10th month in a row in October as soaring mortgage rates
and bottlenecks for building materials put new home purchases out of
reach for many American consumers, prospective first-time buyers in
particular.
The two data points out Tuesday illustrate the uneven impact the U.S.
central bank's rate hikes are having so far on the economy.
Housing has emerged as the most-afflicted sector so far, with interest
rates on the most popular type of U.S. home loan nearing 7% - the
highest since 2006 - while sales of new and existing homes have tumbled
by roughly 25% since January. But there's been little consistent hard
data so far showing demand elsewhere in U.S. economy is falling to the
degree needed to bring inflation materially lower from its
four-decade-high peaks reached over the summer.

"Limited slack and continued strong demand will lead to higher prices,"
economists at Jefferies wrote. "The Fed cannot be happy about this as it
shows they are further behind the curve than they thought and none of
their moves to tighten policy this year have resulted in demonstrable
progress toward getting inflation back down to target."
Manufacturing output rose 0.4% last month, keeping pace with an upwardly
revised 0.4% gain in August, the Federal Reserve said on Tuesday.
Economists polled by Reuters had forecast factory production would rise
0.2%. Output increased 4.7% from a year earlier.
Overall industrial production rose 0.4%, after slipping 0.1% the prior
month. Economists polled by Reuters had estimated a 0.1% increase.
Capacity utilization, a measure of how fully producers are using their
resources, rose to 80.3% last month from an upwardly revised 80.1% in
August.
The figures continued the recent pattern of "hard data," such as
government reports on factory orders and industrial production, running
stronger than the "soft data," such as purchasing manager surveys.
Motor vehicle and parts production, which has experienced notable
volatility because of a global shortage of the semiconductors used for
vehicle operating systems, rose 1% after falling 1.5% in August and
rising 3.6% in July.
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Workers stand on the frame of a building
at Medford Walk by D. R. Horton, a home construction company, in
Medford, New Jersey, U.S., May 23, 2022. REUTERS/Andrew Kelly

"Autos have often been the swing factor for manufacturing since the
beginning of the pandemic due to semiconductor shortages," Jefferies
economists Thomas Simons and Aneta Markowska said. "However, the
strength this month is significantly more broadly-based than usual."
HOUSING HIT
Since March, the U.S. central bank has lifted its benchmark policy
rate from near zero to a range of 3.00%-3.25%, and the fed funds
rate is now expected to end the year in the mid-4% range with
inflation yet to show signs of abating materially.
The rate hikes have torpedoed activity in the housing sector, and
Wednesday's data from the National Association of Home Builders
reinforced that.
The NAHB/Wells Fargo Housing Market index dropped eight points to 38
this month. With the exception of the short-lived plunge during the
spring of 2020 when the country locked down during the first wave of
COVID-19, this was the lowest reading since August 2012. A reading
above 50 indicates that more builders view conditions as good rather
than poor.
Economists polled by Reuters had forecast the index at 43.
The government on Wednesday will publish the September figures for
the number of new homes starting construction and volumes of permits
being issued for new home building projects, both of which have
declined sharply this year. Both are estimated to have fallen
further last month.
"This will be the first year since 2011 to see a decline for
single-family starts," NAHB Chief Economist Robert Dietz said in a
statement. "And given expectations for ongoing elevated interest
rates due to actions by the Federal Reserve, 2023 is forecasted to
see additional single-family building declines as the housing
contraction continues."
"While some analysts have suggested that the housing market is now
more 'balanced,' the truth is that the homeownership rate will
decline in the quarters ahead as higher interest rates and ongoing
elevated construction costs continue to price out a large number of
prospective buyers," Dietz said.

The survey's measure of current sales conditions dropped nine points
to 45. Its gauge of sales expectations over the next six months
slumped 11 points to 35. The component measuring traffic of
prospective buyers fell six points to 25.
(Reporting By Dan Burns; Editing by Nick Zieminski)
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