U.S. industrial production increased 1.1 percent in May, the most in almost six years, as utilities generated more power and companies made more business equipment. Builders began work on more homes than forecast and construction permits reached the highest annual rate in three decades. The rise in production at the nation's factories, mines and utilities followed April's 0.8 percent increase, the Federal Reserve said in Washington. In a separate report, the Commerce Department said housing starts fell 0.7 percent to an annual rate of 1.967 million, topping the median forecast of 1.95 million in a Bloomberg News survey of economists.
Manufacturers are ``doing a little more of the heavy lifting in the economy,'' said Jonathan Basile, an economist at Credit Suisse First Boston Inc. in New York. ``Businesses are investing more and hiring more, and that is a good sign for the sustainability of the expansion.'' Factory production rose 6.4 percent from the previous May for the biggest one-year increase since April 2000. Factory employment last month rose the most in almost six years, the Labor Department said this month, as sales improved and businesses sped assembly to keep up with demand. Manufacturers have lost 1.57 million jobs since the expansion started in November 2001, partly because of productivity gains. The Fed said separately in a survey of regional economic conditions that manufacturing grew in all parts of the country during April and May. In the Chicago area, factories reported ``orders were booked for the foreseeable future and that heavier shipping volumes were leading to a surge in truck demand,'' according to the so-called beige book.
Capacity
The proportion of industrial capacity in use rose to 77.8 percent, the highest since May 2001, from 77.1 percent. Manufacturing capacity rose to 76.4 percent, its highest since April 2001, and within eight months might reach 80 percent, David Greenlaw, chief U.S. fixed-income economist at Morgan Stanley in New York, wrote in a report. Rising use of resources suggests manufacturers are regaining the ability to raise prices, said Ted Wieseman, an economist at Morgan Stanley. The Federal Reserve has said it expects to raise its benchmark interest rate at a ``measured'' pace, which might help head off faster inflation. ``The fact that slack is being taken out of the economy is a significant development for inflation,'' said Wieseman. According to a rule of thumb, once capacity use reaches about 85 percent, bottlenecks and other constraints develop that fuel faster increases in prices, Wieseman said.
Forecasts
Some private factory surveys suggest manufacturers are already facing constraints. The Institute for Supply Management's semi-annual poll released in April showed members reported their companies were working at 85.6 percent of normal capacity compared with 80.1 percent in the December survey. Metals, apparel, food and transportation companies were among those working in excess of 85.6 percent. Economists had expected a 0.8 percent increase in industrial production, according to the median of 69 forecasts in a Bloomberg News survey. The May rise was the largest since a 2 percent increase in August 1998, when production surged after the return of striking General Motors Corp. workers. The pace of housing starts in May was more than the forecast of a 1.95 million rate and compared with a 1.981 million rate in April. Building permits rose 3.5 percent to a 2.077 million annual pace, the fastest in more than 30 years. U.S. 10-year Treasuries fell after the reports. The 4 3/4 percent note due May 2014 fell about 7/16 point, pushing up the yield 6 basis points to 4.73 percent at 11:46 a.m. New York time.
Orders
Builders are starting work on contracts signed earlier in the year when mortgage rates were near record lows. Year-to-date, housing starts are on track for a 2.12 million rate, which would surpass last year's total of 1.85 million, the most in 25 years. The U.S. has had the best five months of job growth since 2000, which is helping to support housing even as mortgage rates rise. ``Housing has remained strong, demand has remained strong, we keep seeing traffic remaining strong and that is fueled by fundamental supply and demand basics,'' said Stuart Miller, chief executive officer of Lennar Corp., the largest U.S. builder by stock market value. Population growth and a strengthening labor market will underpin demand, he said. Electric and gas utility production rose 3.3 percent last month, the biggest rise since January, after rising 1.5 percent in April, the Fed's report showed. Warmer weather prompted people to boost their utility usage to cool their homes. Mine production decreased 0.4 percent last month after rising 0.9 percent.
Manufacturing
Work at factories, which accounts for almost 90 percent of industrial production, rose 0.9 percent last month, the most since February, after rising 0.7 percent in April. Production of electronics increased 5.1 percent and was 31.6 percent higher than in May 2003. Business equipment production, which includes transportation and information processing equipment, rose 1.4 percent in May after increasing 1 percent the previous month. Production of technology equipment, such as computers, communications gear and semiconductors, jumped 3.5 percent last month after increasing 2.1 percent. ``It's important that you look at what's driving this recovery in the semiconductor industry today and it's consumption of consumer products,'' said Brian Halla, chief executive of National Semiconductor Corp., which makes chips used in cell phones and laptops, in an interview last week. Sales at Santa Clara, California-based National Semiconductor rose 34 percent in the quarter ended May 30 compared with the year-earlier period, the biggest increase in at least a decade. Demand for chips used in mobile phones and cameras boosted sales, the company said last week.
Hiring Outlook
Global semiconductor sales will probably rise 29 percent this year, exceeding earlier forecasts, the San Jose, California- based Semiconductor Industry Association said last week. More purchases of personal computers, cell phones, digital cameras and digital video recorders will probably boost chip sales to a record this year, they said. Rising demand is leading to more hiring. Chief Executive Carly Fiorina of Hewlett-Packard Co., the world's second-largest computer maker, said last week the company may add at least 5,000 workers globally in the next year as demand rises for its printers, computers and services. Manufacturers added 32,000 jobs last month, the most since a 143,000 jump in August 1998 and the fourth straight increase, figures from the Labor Department showed earlier this month. The manufacturing workweek rose to 41.1 hours from 40.7 in April and overtime rose by six minutes to 4.7 hours, the most since July 2000.
Sales
Businesses in April had enough goods in stock to satisfy 1.3 months' worth of sales at their current pace, matching the March figure as the lowest on record, a Commerce Department report showed yesterday. Sales have since accelerated. Retail purchases in May rebounded 1.2 percent following a 0.6 percent drop the previous month, Commerce figures showed this week. Purchases at auto dealers, department stores and electronic and appliance stores all improved. A rebound in manufacturing, and the hiring it inspires, is likely to boost economic growth, economists said. The economy is projected to expand 4.6 percent this year, the most since 1984, according to the median estimate of a separate Bloomberg News survey this month. ///www.bloomberg.com