Production in U.S. Probably Climbed in May at Fastest Pace in Four Months

By Timothy R. Homan

June 16 (Bloomberg) — Production increased in May by the
most in four months, showing U.S. manufacturers are overcoming
the fallout from the European debt crisis, economists said
before reports today.

Output at factories, mines and utilities increased 0.9
percent in May, the biggest increase since January and the 10th
gain in the past 11 months, according to the median estimate of
82 economists surveyed by Bloomberg News. Other reports may show
wholesale prices and home construction declined last month.

The need to replenish depleted inventories, growing sales
overseas, and business investment in new equipment are putting
American factories at the forefront of the rebound from the
worst recession since the 1930s. A lack of inflation means the
Federal Reserve has scope to keep the target interest rate near
zero in coming months to help broaden the recovery.

“Manufacturing is a leading component of the recovery,”
said Robert Dye, a senior economist at PNC Financial Services
Group Inc. in Pittsburgh. “The risk of a double-dip recession
in Europe and the low value of the euro both present risks to
U.S. manufacturing, but so far they are not significant drags.”

The Fed’s industrial production report is due at 9:15 a.m.
in Washington. Estimates in the Bloomberg survey ranged from
gains of 0.5 percent to 1.6 percent.

The figures will also show capacity utilization, or the
proportion of plants in use, climbed to 74.5 percent, the
highest level since October 2008, according to the survey
median. The measure averaged 80 percent over the past two
decades, indicating there is still slack in the economy.

Global Demand

Deere & Co., the world’s largest farm-equipment maker, said
on its website last week that sales of utility tractors rose in
the “double digits” in May, compared with a 6 percent increase
for the industry overall.

Growing global demand for agricultural commodities, housing
and infrastructure are driving sales, Samuel Allen, chief
executive officer of the Moline, Illinois-based company, said
last month in a statement. Deere last month raised earnings and
sales forecasts for a second time this year after second-quarter
profit top analysts’ estimates.

Manufacturing shares are outperforming the broader market.
The Standard & Poor’s Supercomposite Machinery Index, which
includes Deere and Peoria, Illinois-based Caterpillar Inc., is
up 11 percent so far this year. The broader S&P 500 Index is
little changed on concern that the European debt crisis will
slow global growth.

Less Inflation

Figures from the Labor Department will show the plunge in
fuel prices precipitated by the turmoil in financial markets
tamped inflation in May.

The producer-price index, due at 8:30 a.m., declined 0.5
percent after a 0.1 percent decrease in April, according to the
survey median.

Yesterday, a Labor Department report showed prices of goods
imported into the U.S. fell 0.6 percent, led by the biggest drop
in petroleum costs since December 2008.

The lack of inflation validates the Fed’s strategy to
maintain the benchmark lending rates on overnight loans between
banks near zero to spur growth. Their next decision on interest
rates is due June 23.

One area that may not fare well in coming months is
housing. Work began on 648,000 houses at an annual pace last
month, down from a 672,000 rate in April, according to the
median forecast of economists surveyed before an 8:30 a.m.
report from the Commerce Department in Washington.

The end of a government tax credit on June 30 will cool
sales and construction in the second half of the year,
economists said. The incentive for first-time homebuyers worth
as much as $8,000, which was extended in November and expanded
to include some current owners, required contracts be signed by
April 30 and settled by the end of this month.

To contact the reporter on this story:
Timothy R. Homan in Washington at
thoman1@bloomberg.net