U.S. Factory Output Rose 0.6% In June Matching Expectations

by Ike Obudulu Posted on July 17th, 2018

Washington D.C., USA: Industrial production rose 0.6 percent in June – matching Economists expectations – after declining 0.5 percent in May, Federal Reserve data showed Tuesday.

For the second quarter as a whole, industrial production advanced at an annual rate of 6.0 percent, its third consecutive quarterly increase. Manufacturing output moved up 0.8 percent in June.

The production of motor vehicles and parts rebounded last month after truck assemblies fell sharply in May because of a disruption at a parts supplier.

Factory output, aside from motor vehicles and parts, increased 0.3 percent in June. The index for mining rose 1.2 percent and surpassed the level of its previous historical peak (December 2014); the output of utilities moved down 1.5 percent. At 107.7 percent of its 2012 average, total industrial production was 3.8 percent higher in June than it was a year earlier. Capacity utilization for the industrial sector increased 0.3 percentage point in June to 78.0 percent, a rate that is 1.8 percentage points below its long-run (1972–2017) average.

The latest results indicate a steady advance in the nation’s manufacturing sector. Factory output climbed at a 1.9 percent annualized rate from April through June, marking the third straight quarterly increase.

Automobile production jumped 7.8 percent in June from a month earlier when it plunged 8.6 percent after a major fire at a parts supplier. Last month’s increase was reflected in increased output of both consumer goods and business equipment.

Excluding motor vehicles, manufacturing production advanced 0.3 percent after a 0.4 percent drop in May. Separately, motor- vehicle sales remained strong in June, according to company reports from automakers such as General Motors Co. and Ford Motor Co.

One surprise was a decline in utility output even as temperatures climbed across the U.S. Last month was the third- warmest June on record, according to the National Oceanic and Atmospheric Administration’s website.

Mining production continued to strengthen on the heels of robust oil and gas well drilling. With the gain, the Fed’s index of mining in June surpassed the previous peak in December 2014.

While manufacturing is likely to keep expanding, headwinds are looming. Prices paid for materials are rising amid concerns about tariffs and supply constraints as businesses report having difficulty keeping pace with demand. Nonetheless, lower corporate and consumer taxes and a strong job market will remain positives for the business investment outlook.

Market Groups

The rebound in the output of motor vehicles and parts contributed to gains of about 1/2 percent for consumer goods and for materials and to a jump of about 2 percent for business equipment.

Excluding automotive products, the index for consumer goods was little changed; the output of other durable consumer goods, on net, edged up, and the indexes for non-energy nondurable consumer goods and for consumer energy products both edged down. The advances in business equipment and in materials reflected gains in nearly all of their other major components in addition to the indexes related to motor vehicles.

The results were mixed for major market groups that are not directly affected by swings in the production of motor vehicles and parts. The index for construction supplies declined, the index for business supplies was little changed, and the index for defense and space equipment moved up.

Industry Groups

Manufacturing output moved up 0.8 percent in June and increased at an annual rate of 1.9 percent in the second quarter, about the same pace as in the first quarter. In June, the index for durables advanced 1.6 percent, while the production of nondurables was little changed. The output of other manufacturing (publishing and logging) declined 0.7 percent. Within durables, the rebound of about 8 percent for motor vehicles and parts was accompanied by increases of 1 percent or more for wood products, for computer and electronic products, and for aerospace and miscellaneous transportation equipment. Within nondurable manufacturing, a large drop for apparel and leather and smaller declines for plastics and rubber products and for food, beverage, and tobacco products were offset by gains elsewhere.

Mining output rose more than 1 percent in June for its fifth consecutive monthly increase; the index jumped more than 19 percent at an annual rate in the second quarter. Gains in the oil and gas sector continued to support the expansion of the mining sector so far this year. In June, the index for utilities decreased 1 1/2 percent, as a loss for electric utilities outweighed a gain for gas utilities.

Capacity utilization for manufacturing rose 0.5 percentage point to 75.5 percent in June, a rate that is 2.8 percentage points below its long-run average. The operating rate for durables increased about 1 percentage point, and the rate for nondurables was unchanged. The utilization rate for mining rose to 92.7 percent, which is about 6 percentage points higher than its long-run average and about 1 percentage point above its peak in 2014. The rate for utilities moved down 1.3 percentage points and remained well below its long-run average.

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.

Other Economy News – NAHB Housing Market Index

U.S. Homebuilder Confidence Holds Steady In July.  Homebuilder confidence in the U.S. has held steady in the month of July, according to a report released by the National Association of Home Builders on Tuesday.

The report said the NAHB/Wells Fargo Housing Market Index remained unchanged in July after dipping to 68 in June. The unchanged reading matched economist estimates.

“Consumer demand for single-family homes is holding strong this summer, buoyed by steady job growth, income gains and low unemployment in many parts of the country,” said NAHB Chairman Randy Noel.

The NAHB said the index measuring current sales conditions also remained unchanged from the previous month at 74 in July.

Meanwhile, a two-point drop by the index gauging expectations in the next six months was offset by a two-point increase by the index charting buyer traffic.

“Builders are encouraged by growing housing demand, but they continue to be burdened by rising construction material costs,” said NAHB Chief Economist Robert Dietz.

He added, “Builders need to manage these cost increases as they strive to provide competitively priced homes, especially as more first-time home buyers enter the housing market.”

On Wednesday, the Commerce Department is scheduled to release a separate report on new residential construction in the month of June.

Housing starts are expected to edge down to an annual rate of 1.320 million in June after jumping to a rate of 1.350 million in May.

Other Economy News – Gradually Raising Interest Rates The Best Way Forward, Says Fed Chair Powell

Federal Reserve Chairman Jerome Powell reiterated during testimony on Capitol Hill on Tuesday that the central bank believes gradually raising interest rates is the “best way forward.”

Appearing before the Senate Banking Committee, Powell offered an upbeat assessment of the state of the U.S. economy.

Powell said the U.S. economy has grown at a solid pace so far this year and noted the latest data suggests economic growth in the second quarter was “considerably stronger” than in the first quarter.

The Fed chief also described recent inflation data as “encouraging,” with consumer price inflation a little above the central bank’s 2 percent target.

“Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years,” Powell said.

With the strong job market, inflation close to the objective, and the risks to the outlook roughly balanced, Powell said the Fed believes gradually raising interest rates is “the best way forward.”

“We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses,” Powell said.

He added, “On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective.”

Powell said the Fed will continue to weigh a wide range of relevant information and stressed that the central bank’s policy decisions will depend on the economic outlook.

The Fed has raised rates twice this year to the current range of 1.75 to 2 percent and has signaled two more rate hikes before the end of the year.

“The upbeat tone of Fed Chair Jerome Powell’s semi-annual testimony to Congress suggests that uncertainty over trade policy will not prevent the Fed from continuing to raise interest rates,” said Andrew Hunter, U.S. Economist at Capital Economics.

He added, “Although trade tensions remain a downside risk, we continue to expect strong activity growth and rising inflation to prompt the Fed to raise interest rates in September and December this year and twice more in early 2019.”

Powell did not say much in his prepared remarks about the recent trade disputes between the U.S. and key trading partners other than to say the ultimate outcome of current discussions over trade policy is “difficult to predict.”

Leave a Reply