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The Globe and Mail

U.S. manufacturing stumbles as auto sector weakens

Assemblyman Brian Mullins works on a Ford Expedition at the auto maker's Michigan Truck plant in Wayne, Mich.

Carlos Osorio/AP

U.S. manufacturing got off to a weak start this year as motor vehicle output tumbled in January, but a rebound in factory activity in New York state this month suggested any setback could be temporary.

In a further sign that the sluggish economic recovery remains on track, consumers were a bit more upbeat early this month even as they paid more for gasoline and saw an increase in taxes reduce their paycheques, other data on Friday showed.

"The economy is on a slowly improving course and it's got enough headwinds that we are going to see some volatility in these month-by-month numbers," said Jerry Webman, chief economist at OppenheimerFunds in New York.

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Manufacturing output fell 0.4 per cent last month, the Federal Reserve said. But production in November and December was much stronger than previously thought and the 3.2 per cent drop in auto output – the largest since August – followed two solid months, suggesting it was just a temporary pause.

"Given that most of the weakness was due to the give-back in motor vehicle production after the 11 per cent surge in activity during the last two months of last year, we expect this retreat in industrial output to be temporary," said Millan Mulraine, senior economist at TD Securities in New York.

In a separate report, the New York Federal Reserve Bank said its "Empire State" general business conditions index, which gauges factory activity in the state, rose to 10.0 from minus 7.8 the month before. February's index showed the first growth in the sector since July and the best performance since May, 2012.

The rebound was driven by new orders, which hit their highest level since May, 2011. Economists said the pickup in activity likely reflected recovery from Hurricane Sandy, which struck the East Coast in late October.

"What we are seeing in manufacturing is that growth that had been leading the economy is now roughly keeping pace with the overall economy and that's likely to remain the case through 2013," said Gus Faucher, senior economist at PNC Financial Services Group in Pittsburgh.

Separately, the Thomson Reuters/University of Michigan index of consumer sentiment rose to 76.3 in early February from 73.8 in January.

Households drew comfort from steady job gains, which together with rising home and stock prices should help offset a recent increase in payroll taxes and underpin consumer spending.

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"Consumers are getting over the fact that their paycheques are a little smaller since the beginning of the year due to the sunset of the payroll tax holiday," said Thomas Simons, an economist at Jefferies & Co. in New York.

"This offers some encouragement that consumption will recover following a weak month in January."

The fairly upbeat sentiment data helped to lift the dollar against the yen, but stocks on Wall Street were little moved, consolidating after a rally that saw the Standard & Poor's 500 index rise nearly 7 per cent so far this year.

Last month's weakness in manufacturing contributed to pushing overall industrial production down 0.1 per cent.

Production at the nation's mines fell 1.0 per cent, but cold weather boosted utilities production by 3.5 per cent. The need for Americans to spend more money on utilities in January should support consumer spending this quarter.

Forecasting firm Macroeconomic Advisers raised their first-quarter growth estimate by a tenth of a percentage point to a 2.5 per cent annual rate, which would be a nice step up after a dismally weak fourth quarter.

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