US industrial production data shows manufacturing rebound

US industrial production data shows manufacturing rebound

US factory output increased much more than expected in August, according to data released by the Federal Reserve on Tuesday.The data provide the last snapshot of US economic growth as the Fed’s rate-setting committee meets in Washington this week, where it is expected to make a second consecutive cut to interest rates. Unexpected strength in manufacturing will offer cheer to the White House, and may improve visibility for an economy that Fed chair Jay Powell has described as “murky”. The Fed’s industrial production index rose by 0.6 per cent last month. Analysts had predicted 0.2 per cent. Manufacturing, the single largest component of that index — and politically the most important — rose by 0.5 per cent for the month, well above predictions of 0.2 per cent.Production was boosted by one-time factors, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics, pointing to a rebound in oil production, which can be erratic. “Looks great but it won’t last,” he said. “The initial slowdown [in manufacturing] was due to China’s cyclical softening last year, but the trade war now is the key problem for the sector, and we think a comprehensive deal with China is unlikely before next year’s US election.”Capacity utilisation, a measure of how much manufacturers are using their available plants and equipment, rose to 77.9 per cent, still down from its high of 79.3 last August but up after several consecutive months of declines. Analysts had predicted capacity at 77.6 per cent. 

The trend is looking more like a modest midcycle correction, which begs the issue of whether the Fed’s midcycle correction in interest rates is drawing to a close

“Purchasing managers say the manufacturing sector is in recession, but the contraction in factory production actually looks much more modest,” said Chris Rupkey, chief financial economist at Mitsubishi UFJ Financial. “The trend is looking more like a modest midcycle correction, which begs the issue of whether the Fed’s midcycle correction in interest rates is drawing to a close.”The industrial production index gathers data from industry groups on products as varied as crude oil, car tyres and plaster board, weighting each by their share of overall production. Economists watch the manufacturing component of the index closely, as it offers the clearest picture of overall growth. Manufacturing represents only 11 per cent of gross domestic product, and 8 per cent of US employment, but the industrial production index has both political and economic significance. Manufacturing growth had slowed since September of 2018, as the US and China increased threats and counter-threats in their trade war, showing the consequences that such threats can have on business investment even before tariffs go into effect. Business investment shrank in the second quarter of 2019. 
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The index for the production of business equipment grew by a full percentage point in August, however, after declining by 0.6 per cent in July. This could indicate that business investment will pick back up in the third quarter.A manufacturing recession in 2015 and 2016, driven by a collapse in the price of oil, played a role in the last presidential election. Manufacturing is a bigger share of the economies of a few key states, such as Michigan, Wisconsin and Pennsylvania, that swung Republican in 2016.Jay Powell, chairman of the Federal Reserve, has said recently that the slowdown in manufacturing, as businesses waited out big decisions during the back and forth on trade, did not send a clear signal to the Fed’s rate-setting committee.“Trade uncertainty is not one of those things . . . central banks have a lot of practice dealing with,” he said at an event in Zurich in early September. 


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