June 17, 2022

Industrial production rose 0.2% in May after having climbed 1.4% in April after rising 0.5% in March.  After four months of strong gains industrial production slowed its rate of ascent in May amidst the fears of what higher interest rates and rapidly rising inflation might do to the economy in the second half of this year and beyond.

Breaking industrial production down into its three basis categories — manufacturing, mining, and utilities –the Fed reported that manufacturing production declined 0.1% in May after having risen 0.8% in both March and April.  Like the overall index factory activity seems to have slowed a bit in May.

While the manufacturing sector declined slightly in May, it continues to deal with supply constraints and labor shortages which are curtailing the speed with which it can boost production.  Supplier deliveries continue to be very slow although the situation is showing some signs of improvement.

For the past two years  the manufacturing sector has been held back by the automobile sector as the chip shortage has curtailed auto production in recent months.  However, automobile production rose 0.7% in May after having climbed 3.3% in April and 9.0% in March.  With three straight months of strong gains in production in the motor vehicle sector, it appears that the supply constraints described above seem to be easing

High tech production was hit less sharply than most other sectors of the economy during the recession as business people turned to technology to help them cope with the fallout from the virus.  As a result high tech fell only slightly during the recession.  It has climbed quickly for the past two years but, as evidenced by the past three months it appears to have plateaued as higher interest rates and inflation are causing firms to pull back on tech spending.  In the past year high tech production has risen 4.1%.  However, high tech spending helped the economy out of the recession and it is also going to help businesses adapt to the new economy that is still evolving.  Expect continued growth in this sector of the economy.

The manufacturing sector will continue to climb slowly in the months ahead because orders are still flowing in, but firms are unable to boost production enough to keep pace with demand as they still encounter an inability to find qualified workers and they face delays in getting the required production materials from their suppliers.  The ratio of the orders to inventories  components of the purchasing managers index, while lower than it was last year, is still high.  Manufacturers need to keep boosting production.

Mining (14%) output rose 1.3% in May after rising 1.1% in April and 3.2% in March.  Mining has risen 9.0% in the past year.

The strength in the mining component is being driven by the demand for oil which is strong as the global economy continues to recover and as the war between Russia and Ukraine push oil prices higher.  Indeed, drilling activity has increased 57.2% in the past year.  But one of the lingering problems is the administration’s dislike for the fossil fuel industry and its efforts to, essentially, drive it out of basis in favor of more environmentally friendly means of production.  Oil production is rising, but remains well below the level of output that existed prior to the recession.

Utilities output rose 1.0% in May after having jumped 5.5% in April after having declined 4.7% in March.   Over the past year utility output has risen 8.4%.

Capacity utilization in the manufacturing sector declined 0.1% in May to 79.1% after having climbed 0.6% in April and 0.6% in March.   It is now higher than the 77.4% level that is generally regarded as effective full capacity utilization.  Firms may soon begin to boost capacity which has not grown at all for a decade.

We expect Q2 GDP growth of 2.0% and 2.0% GDP growth in 2022.

Stephen Slifer

NumberNomics

Charleston, SC