Production at U.S. factories remains at problematic levels, but the rate of decline appears to by slowing -- a mild improvement -- and in this economy and market, you take what you can get.

Output at U.S. factories declined 0.5 percent in April, for the slowest decline pace in six months, the U.S. Federal Reserve announced Friday, as the nation's industrial sector appears to be forming a bottom. Factory output declined 1.7 percent in March.

Factory output is now 16 percent below its peak reached in December 2007. The factory utilization rate, also known as capacity utilization, fell to its lowest level since the Fed started keeping records for the statistic in 1967: to 69.1 percent in April, from 69.3 percent in March.

Economists surveyed by Bloomberg News had expected industrial production to decline 0.6 percent and capacity utilization to fall to 68.8 percent in April.

Equally telling, industrial output has fallen for six straight months and in 15 of the last 16 months, as factories trim unwanted stockpiles and reduced production due to slack demand stemming from the U.S. and global recessions.

Avery Shenfeld, chief economist for CIBC World Markets in Toronto, likes the apparent bottoming trend, but still wants the market to sop-up more demand before declaring that a recovery is underway.

"We need a number of months more where production runs below sales in order to induce a return to growth for factory activity in America," Shenfeld, told Bloomberg News Friday. "At some point, we're going to have to turn it back up to meet demand. But we're not there yet."

NY factory index: more improvement

Meanwhile, manufacturing in the New York region continued to show improvement in May -- perhaps representing another "green shoot" or "bottom sounding."

The Empire State Manufacturing Index rose to its highest level since August, to -4.6 in May from -14.7 in April, the New York Federal Reserve announced Friday.

Economists surveyed by Bloomberg News had expected the Empire State Manufacturing Survey only to rise to -12.0 in May.

Manufacturers' sentiment has also continued to display a more encouraging pattern, the N.Y. Fed said. While 28 percent of respondents said conditions had worsened, 25 percent said they had improved. The six-month outlook index rose to 43.8 in May, its highest level since late 2007.

Investors should pay attention to industrial production and capacity utilization data because, although manufacturing accounts for less than 20 percent of U.S. GDP, it accounts for most of the nation's cyclical growth. Continual declines in production point to a softening economy; rising, the reverse. A low capacity utilization rate usually reflects softer demand; a high rate, strong demand, with the potential for increased price pressure.

In addition, economists also monitor the Empire State index because it typically provides an early read on the movements of broader manufacturing surveys, such as the Institute for Supply Management's manufacturing survey: that index rose to 40.1 in May, its highest level since September 2008.

Economic Analysis: One has to be encouraged by the slowing of the industrial decline, but as CIBC Economist Shenfeld noted, investors should keep in mind that the declines must stop, and actual growth must start, to say a recovery is underway. The industrial sector's current condition is roughly equivalent to a patient who has suffered a massive internal hemorrhage: at this stage, we've stopped almost all of the bleeding, but the patient needs time (and stimulus infusions) to regain strength. Further, if some manufacturing activity, as expected, has been permanently lost to globalization, it underscores the need for the United States to create and expand new, value-added industrial and tech sectors -- such as renewable energy, information technology, infrastructure and quality-of-life -- to make up for the lost industrial output and jobs. Those new sectors must emerge for the United States to remain a strong, versatile, and prosperous nation with ample, value-added economic opportunities.


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