EconoFACTS

August 16, 2022 | 10:23

Industrial Production Bucks The Trend

Economist

Economist
Economics

Erik conducts research on financial product market trends, emerging risks and macroeconomic trends for the Bank.... (Read more)

Erik Johnson

Economist
Economics

Erik conducts research on financial product market trends, emerging risks and macroeconomic trends for the Bank.... (Read more)

U.S. industrial production jumped 0.6% in July, which was double the consensus call. The revisions, however, were discordant. The previous -0.2% drop in June was erased, but the four months prior to that (February to May) were revised down. Summing it all up, industrial production is now off to a healthier start to Q3 than anticipated, but doesn't look as rosy when measuring its progress over the course of the pandemic (3% above February 2020 levels).

Manufacturing output also surprised by rising 0.7% (consensus 0.2%)—that breaks a run of back-to-back declines. The rebound in the manufacturing sector was fairly widespread with durable output rising 1.3% and nondurables ticking up 0.1%. On the latter, the more granular results were mixed with apparel and leather, chemicals, and plastics and rubber products making up for declines in most other industries. The strong showing for durables was powered by a 6.6% snapback in motor vehicle assembly, which also broke a pair of monthly declines. Most of the durables sector also rose with many subsectors growing by at least 1% m/m (e.g., fabricated metal products, aerospace). However, furniture and related products (-1.5%) and computers and office equipment (-1.3%) both struggled in July. Despite the strength in July, manufacturing still has some ground to cover to turn around its recent sluggish trend and that will be increasingly challenging with persistent inflation and rising rates.

Despite the third hottest July on record (128 years) in the U.S. and Texas having the warmest July in recorded history, utilities output decreased 0.8% as operating rates fell. Mining output rose 0.7% in July (its third straight increase) and is now up 7.9% year-over-year.

Capacity utilization reversed course in July, ticking up 0.4 ppts to 80.3. That brings it back up to its recent April high, which is also the highest since September 2018—something that the Fed is going to be watching closely in the months ahead to see if price pressures are easing. Manufacturing capacity utilization jumped 0.5 ppts to 79.8%. That more than makes up for the drop in June and highlights that pressure on capacity is more acute in the manufacturing sector compared to overall production, as utilization is 1.6 ppts above its long-run average.

Bottom Line: Industrial production showed some resilience in July, but we still expect it to face significant headwinds amid slowing consumer demand and rising rates.

Table 1 - United States — Industrial Production

(month/month % change : s.a.)

Source: BMO Economics, Haver Analytics