By Lucia Mutikani
WASHINGTON, March 16 (Reuters) - U.S. factory production increased marginally in February as manufacturing remained constrained by tariffs on imports, and the conflict in the Middle East could raise operating costs.
Other data on Monday showed sentiment among single-family homebuilders nudging up in March. Manufacturing and the housing market have been hardest hit by higher interest rates and President Donald Trump's sweeping tariffs, with business leaders and builders saying the duties
had increased costs.
Trump has defended the tariffs, which have been struck down by the U.S. Supreme Court, as necessary to protect domestic manufacturing, though about 100,000 factory jobs have been lost since January 2025.
"The tariffs have failed to provide a substantial 'reshoring boost' to the sector so far, with the lift from reduced foreign competition apparently mostly offset by higher input costs, supply chain disruption, and the hit to investment demand from uncertainty around trade policy," said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.
Manufacturing output rose 0.2% last month after an upwardly revised 0.8% gain in January, the Federal Reserve said. Economists polled by Reuters had forecast production for the sector, which accounts for 10.1% of the economy, rising 0.1% after a previously reported 0.6% rise in January. Production at factories advanced 1.3% year on year in February.
Motor vehicle production increased 1.7% after surging 2.4% in January. There were also solid gains in the output of computer and electronic products as well as electrical equipment, appliances and components, likely reflecting an artificial intelligence spending boom.
The government reported last week that imports of capital goods rose to a record high, driven by computers and telecommunications equipment. Business spending on AI and data center construction is helping to support technology-related segments of manufacturing. Output of wood products rose.
But machinery output dropped 1.2% after rebounding 1.5%. Durable manufactured goods production edged up 0.1%. Nondurable manufacturing output also increased 0.2%, lifted by chemicals, printing and support as well as plastics and rubber products.
While manufacturing surveys have pointed to some recovery in sentiment, that could be offset by the U.S.-Israeli war with Iran, which has boosted oil prices and sent retail gasoline prices soaring more than 70 cents per gallon since the conflict started.
"Manufacturing is at risk from higher energy prices, which will crimp aggregate demand via a real income shock and uncertainty," said Bernard Yaros, lead U.S. economist at Oxford Economics.
Elsewhere, mining output increased 0.8%, adding to January's 0.9% gain. Energy production was unchanged, though oil and gas well drilling increased 0.6%. This category could get a boost from the higher oil prices, though economists said the increased investment would probably be insufficient to boost the economy.
HIGHER OIL PRICES MAY BOOST DRILLING
"Mining production will respond to higher energy prices in the next months," said Yaros. "However, a pickup in oil and gas investment will not offset the drag on the broader economy from the oil price shock."
Utilities production fell 0.6% as mild temperatures reduced demand for heating. Utilities production gained 0.1% in January.
Overall industrial production climbed 0.2% after an unrevised 0.7% increase in January. Industrial output advanced 1.4% year on year in February.
Capacity utilization for the industrial sector, a measure of how fully firms are using their resources, was unchanged at 76.3%. It is 3.1 percentage points below its 1972–2025 average. The operating rate for the manufacturing sector was also flat at 75.6%. It is 2.6 percentage points below its long-run average.
Separately, the National Association of Home Builders/Wells Fargo Housing Market index increased one point to 38 in March, remaining below the 50 break-even point for 23 straight months. The slight improvement in sentiment likely reflected lower mortgage rates at the start of the year after Trump ordered government-backed mortgage firms Fannie Mae and Freddie Mac to expand purchases of mortgage-backed securities.
But mortgage rates have reversed course, rising in recent weeks as the Middle East conflict stoked inflation fears, driving up U.S. Treasury yields. Mortgage rates track the benchmark 10-year U.S. Treasury yield. Financial markets have reduced the odds of more than one interest rate cut from the Federal Reserve this year. The U.S. central bank is expected to leave rates unchanged on Wednesday.
Tariffs have raised prices for building materials and appliances, while the White House's immigration crackdown, including raids at construction sites, has undercut labor supply. Despite the Supreme Court ruling, Trump has imposed a 10% global tariff, which he said would rise to 15%. His administration last week launched two trade investigations into excess industrial capacity in 16 major trade partners and into forced labor as it seeks to rebuild tariff pressure on trade partners.
The share of builders reporting cutting prices ticked up to 37% from 36% in February. Builders are trying to reduce excess new housing inventory. The survey's measure of current sales conditions nudged up to 42 from 41, while its gauge of future sales rose two points to 49. A measure of prospective buyer traffic increased three points to 25.
Trump last week signed an order to eliminate regulatory burdens associated with housing construction and another easing regulations related to mortgage costs and home loans. Housing affordability has become an increasingly potent political issue ahead of the November midterm elections.
"Down-payment hurdles and uncertainty from the conflict with Iran and the price of oil will be headwinds going forward," said NAHB chief economist Robert Dietz.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Mark Porter)
