By Lucia Mutikani
WASHINGTON (Reuters) -Production at U.S. factories increased more than expected in February amid a rise in temperatures, but data for the prior month was revised sharply down as manufacturing remains hamstrung by high interest rates.
Manufacturing, which accounts for 10.3% of the economy, has been squeezed by 525 basis points worth of interest rate hikes from the Federal Reserve since March 2022. The U.S. central bank is expected to leave rates unchanged at the end of a two-day policy meeting next Wednesday. Financial markets anticipate rate cuts will start in June.
"The manufacturing sector continues to face headwinds from higher borrowing costs and tighter credit conditions," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "However, lower interest rates as the Fed starts cutting the target range this year, as well as an onshoring of supply networks may provide support to factory activity in 2024."
Manufacturing output rebounded 0.8% last month after a downwardly revised 1.1% drop in the prior month, the Fed said. Factory output was previously reported to have dropped 0.5% in January, weighed down by frigid temperatures.
Economists polled by Reuters had forecast factory output would rise 0.3%. Production at factories fell 0.7% on a year-on-year basis in February. Despite the overall weakness, there remain pockets of manufacturing strength.
Motor vehicle and parts output accelerated 1.8% last month, the U.S. central bank's report showed. That followed a 3.8% weather-induced decline in January.
Durable goods manufacturing production increased 1.0%. Machinery output rose 1.7%. There were also big increases in the production of wood products as well as miscellaneous goods. Output of computer and electronic products rose as did that of electrical equipment, appliances and components.
This bodes well for business investment. Production of nondurable goods rose 0.7%, lifted by the chemicals, printing and support, and paper output categories.
Mild temperatures also boosted mining output, which rebounded 2.2% after plunging 2.9% in January. But oil and gas well drilling fell for the fourth straight month. It was down 10.1% on a year-on-year basis.
Utilities production fell 7.5% as demand for heating ebbed. That followed a 7.4% surge in January.
Overall industrial production gained 0.1% in February after falling 0.5% in January. Industrial production fell 0.2% on a year-on-year basis in February. Capacity utilization for the industrial sector, a measure of how fully firms are using their resources, was unchanged at 78.3%. It is 1.3 percentage points below its 1972-2023 average.
The operating rate for the manufacturing sector rose six-tenths of a percentage point to 77.0%. It is 1.2 percentage points below its long-run average.
Stocks on Wall Street were trading lower. The dollar was little changed against a basket of currencies. U.S. Treasury yields were mixed.
IMPORT PRICES RISE
News on the inflation front was mixed. Import prices rose moderately in February after surging in January, but the overall disinflationary trend is slowing. Declining goods prices accounted for much of the cooling in inflation last year.
Import prices were up 0.3% last month after a 0.8% jump in January, the Labor Department's Bureau of Labor Statistics reported. The increase in import prices, which exclude tariffs, was in line with economists' expectations.
In the 12 months through February, import prices dropped 0.8% after declining 1.3% in January. Though annual import prices decreased for the 13th straight month, the pace has slowed since prices slumped 2.4% in December. Government data this week showed both consumer and producer prices increased strongly for a second consecutive month in February.
"While import prices continue to exert modest disinflationary pressure on U.S. consumer inflation, that pressure is waning," said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.
Imported fuel prices shot up 1.8% in February after rebounding 1.2% in the prior month. The cost of imported food increased 1.1% after advancing 1.7% in January.
Excluding fuels and food, import prices gained 0.1%. These so-called core import prices increased 0.7% in January. They fell 0.7% on a year-on-year basis in February.
The import price data did not change economists' expectations that the personal consumption expenditures (PCE) price index, excluding food and energy, increased 0.3% in February after a gain of 0.4% in January.
The core PCE price index is one of the inflation measures tracked by the Fed for its 2% target. Core inflation is forecast to rise 2.8% in February, which would match January's gain.
Consumers expected inflation to remain steady at higher levels over the next 12 months and beyond, a report from the University of Michigan showed.
The University of Michigan survey's reading of one-year inflation expectations was unchanged at 3.0% in March. Its five-year inflation outlook held steady at 2.9% for a fourth straight month. Consumer sentiment was also stable this month.
"Consumers may instead be taking their cue from recent political developments, with the low approval ratings of both candidates suggesting little enthusiasm about the rematch between President Joe Biden and Republican nominee Donald Trump later this year," said Stephen Brown, deputy chief North America economist at Capital Economics.