August 15, 2019

Industrial production declined 0.2% in July after having risen 0.2% in both May and June.   During the past year industrial production has risen 0.5%, but one year ago it was climbing at a 3.9% pace.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) fell 0.4% in July after having risen 0.6% in June.  During the past year  factory output has declined 0.5% (red line, right scale).

To a large extent factory production is being curtailed by the trade sector and the impact of tariffs on both manufacturing firms that import components used in the production process from overseas, as well as firms that export goods to other countries because of their tit-for-tat increase in tariffs.  In addition, slower production in the manufacturing sector has come from the oil and gas sector.  Over the last year oil and gas well drilling activity has fallen 6.5%. But a year ago drilling activity had risen 9.7%.  Two years ago it was growing 75.0%.  But despite the drop-off in drilling activity, crude oil output has surged in the past year.  The implication is that productivity in that sector continues to climb.

Mining (14%) output declined 1.8% in July after having risen 0.6% in June.  Over the past year mining production has risen 5.5%.

Utilities output rose 3.1% in July after having declined 3.3% June.  This component of industrial production is always volatile.  During the past year utility output has risen 0.3%.

Production of high tech equipment rose 0.2% in July after having risen 0.5% in June and 1.0% in May.  Over the past year high tech has risen 5.3%.  It is  likely that growth in this category has been hit by reduced demand for technological products from outside of the U.S. where economic activity has slowed noticeably.   However, this series has been climbing at a respectable rate probably because the tight labor market  is enticing firms to spend money on technology to boost output without adding to headcount.  This should lead to continued  strength in nonresidential investment which will, in turn, lead to a sustained pickup in productivity.

Capacity utilization in the manufacturing sector declined 0.4% in July to 75.4% after having risen 0.4% in June.  It remains somewhat below the 77.4% level that is generally regarded as effective peak capacity.  As long as demand in the manufacturing sector remains weak, factory owners will be reluctant to spend more money on technology and re-furbishing or expanding their assembly lines to boost output.

Given that the economy remains relatively robust the manufacturing sector should tend to climb in the months ahead, but the higher tariffs are curtailing its rate of growth.  Look for little change in industrial production between now and yearend.

Stephen Slifer


Charleston, SC