Data show factory sector is slowing down

WASHINGTON — The manufacturing sector, which has been the strength of the U.S. economy, is slowing down, according to three separate reports released Thursday by the Federal Reserve.

The timeliest data show further weakening in July after manufacturing output fell in June for the first time in a year.

“Economic growth continues to soften into the third quarter,” wrote Neil Dutta, an economist for Bank of America’s Merrill Lynch.

Meanwhile, the Labor Department reported that U.S. wholesale prices fell a seasonally adjusted 0.5% in June, marking their largest decline since February, led by lower food prices.

And the Philadelphia Federal Reserve Bank said its manufacturing sentiment survey hit 5.1 in July, down from 8 in June and 21.4 in May. The reading is above zero, which shows the sector is still expanding, but the breadth of that expansion has diminished.

The Empire State sentiment index from the New York Fed also fell to 5.1 in July from 19.6 in June. It was expected to slip to 19.

The two regional Fed surveys came after the Fed reported that industrial output rose 0.1% in June, mostly because air conditioners were running as people tried to escape the heat. Manufacturing output alone fell 0.4%, the first outright decline in a year.

The three indicators together signaled a deceleration of growth, said John Silvia, chief economist for Wells Fargo Securities. “This is not an outright contraction — indeed, the factory sector remains very strong relative to a year ago — it is simply the inventory rebound drawing to an end.”

“Manufacturers will rely on the domestic economy to determine production needs,” Silvia said. “These factors will result in slower production and weaker economic growth in the second half of 2010.”

In a separate report, the Labor Department said that food prices fell 2.2%, the largest drop since April 2002, with prices for fresh and dry vegetables down 21.8%. Energy prices fell 0.5% in June, with the gasoline index down 1.6%.

Core prices, which exclude volatile energy and food prices, rose 0.1%, the eighth consecutive monthly gain.

The 0.5% decline in overall producer prices was more than expected by economists surveyed by MarketWatch, who had forecast those prices would fall 0.1%.

Over 12 months, overall producer prices are up 2.8%, and the core is up 1.1%. In May, overall producer prices fell 0.3%, and the core rose 0.2%.

Chances are limited for sustained disinflation at the consumer level, analysts at Barclays Capital Research wrote in a research note.

Nutting and Mantell write for MarketWatch.com/McClatchy.