U.S. Industrial Production Flat Amid Drop In Utilities Output

by Ike Obudulu Posted on July 16th, 2019

Washington: With a steep drop in utilities output offsetting increases in manufacturing and mining output, the Federal Reserve released a report on Tuesday showing U.S. industrial production was unexpectedly flat in the month of June.

The Fed said industrial production was unchanged in June after climbing by 0.4 percent in May. Economists had expected production to edge up by 0.2 percent.

Industrial production was unchanged as utilities output plunged by 3.6 percent, with milder-than-usual temperatures reducing demand for air conditioning.

On the other hand, the report said manufacturing output climbed by 0.4 percent, partly reflecting a 2.9 percent jump in production of motor vehicles and parts.

Excluding autos, production rose by 0.2 percent, although Michael Pearce, Senior U.S. Economist at Capital Economics, noted manufacturing output still declined by 2.2 percent annualized in the second quarter.

“With the global backdrop still weak and the survey evidence consistent with manufacturing output declining, we expect the manufacturing sector to remain weak in the second half too,” Pearce said.

The Fed said mining output also rose by 0.2 percent, but Pearce said output in the sector is likely to begin declining modestly in the second half of the year unless the recent rally in oil prices continues.

The report also said capacity utilization for the industrial sector edged down to 77.9 percent in June from 78.1 percent in May. Economists had expected capacity utilization to come in unchanged.

Capacity utilization in the mining sector crept up to 75.9 percent, while capacity utilization in the mining sector dipped to 91.5 percent and capacity utilization in the utilities sector slumped to 74.6 percent.

“Rising spare capacity reduces the need for firms to invest and will help maintain downward pressure on core inflation, both of which will be key reasons why the Fed is likely to cut interest rates in the coming weeks,” said Pearce.

Note. The statistics in this release cover output, capacity, and capacity utilization in the U.S. industrial sector, which is defined by the Federal Reserve to comprise manufacturing, mining, and electric and gas utilities. Mining is defined as all industries in sector 21 of the North American Industry Classification System (NAICS); electric and gas utilities are those in NAICS sectors 2211 and 2212. Manufacturing comprises NAICS manufacturing industries (sector 31-33) plus the logging industry and the newspaper, periodical, book, and directory publishing industries. Logging and publishing are classified elsewhere in NAICS (under agriculture and information, respectively), but historically they were considered to be manufacturing and were included in the industrial sector under the Standard Industrial Classification (SIC) system. In December 2002 the Federal Reserve reclassified all its industrial output data from the SIC system to NAICS.

Officials at the Fed tend to look at capacity use measures for signals of how much “slack” remains in the economy how far growth has room to run before it becomes inflationary.

The Fed’s monthly data are volatile and often get revised. Manufacturing, which makes up 75 percent of total industrial production, accounts for about 12 percent of the U.S. economy

Industrial production, also called, factory output measures change in the total inflation-adjusted value of output produced by manufacturers, mines, and utilities;

It’s a leading indicator of economic health – production reacts quickly to ups and downs in the business cycle and is correlated with consumer conditions such as employment levels and earnings.

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