After a period of contraction last month, U.S. industrial output resumed increasing in July on the strength of surging automotive production and improved equipment sales. The gain exceeded expectations, but will it generate more long-term growth?

Industrial production in the United States increased 1 percent in July, following a 0.1 percent decline (initially reported as 0.1 percent growth before revised figures became available) in June, according to the U.S. Federal Reserve‘s latest industrial sector report. As of July, industrial production has increased 12 of the last 13 months.

Despite the slowdown in June, production is rebounding at an unexpected pace, strengthening prospects that the industrial sector will remain at the forefront of the economic recovery.

Released on Tuesday, the Fed report indicates that much of the July production increase was due to growth in manufacturing output, which rose 1.1 percent following a 0.5 percent drop in June and a 1.1 percent increase in May. Manufacturing production remained 7.7 percent above its prior-year level. Mining output rose 0.9 percent in July, following 0.2 percent growth in June, while utilities output edged up 0.1 percent after posting 2.3 percent growth the prior month.

At 93.4 percent of its 2007 average, total industrial production remained 7.7 percent above the year-ago level.

“The last time factory output increased so steeply was August 2009, when the government’s Cash for Clunkers program drove a 1.3 percent gain,” the Associated Press reports. “However, June’s results were revised to show a 0.1 percent loss. That was the first decrease since the previous June.”

Production of motor vehicles and parts was the largest contributor to manufacturing growth in July, increasing nearly 10 percent for the month. However, excluding automotive production, manufacturing output still rose 0.6 percent, indicating widespread gains across several production categories.

According to the Fed, durable goods production jumped 4.9 percent in July, led by automotive products and home electronics. Output of non-durable goods, excluding energy products, declined 0.2 percent, although the indexes for chemicals and paper products showed gains. Business equipment production increased 1.8 percent for the month, while materials output rose 0.9 percent.

“While signs of slowing in both the general economy and in manufacturing have become apparent in recent months, the industrial production report for July shows that the shaky U.S. economic recovery has yet to fully impede the strong factory sector rebound,” Cliff Waldman, economist for the Manufacturers Alliance/MAPI, wrote in an analysis of the Fed report.

Meanwhile, capacity utilization, which measures how much of the industrial sector’s production capabilities are being used, rose 0.7 percentage points to reach 74.8 percent, 5.7 points above the July 2009 total but still 5.8 points below the average from 1972 to 2009.

“Increased business investment is propelling the gains in manufacturing, which accounts for 11 percent of the world’s largest economy,” Bloomberg News reports. “At the same time, a slowdown in consumer spending will reduce the need to rebuild inventories, while cooling growth overseas may limit exports, meaning the pace of expansion will probably slacken.”

A significant portion of the increased capacity usage and higher automotive production may also be due to temporary seasonal adjustments.

“Growing demand for new cars and trucks prompted some automakers to keep factories open in July,” the Washington Post reports. “Traditionally, auto companies close operations in the summer and use the time to refurbish assembly lines.”

Regional manufacturing centers have also had fluctuating performance. According to the Federal Reserve Bank of New York’s Empire State Manufacturing Survey this week, the general business conditions index for the region rose two points in August, to 7.1. However, the new orders index fell below zero for the first time in over a year, dropping 13 points to -2.7, indicating a decline in orders. The shipments index dropped 18 points, hitting -11.5 in August.

Earlier

Factory Output Drops in June

U.S. Industrial Production Rises in May

Resources

Industrial Production and Capacity Utilization
U.S. Federal Reserve, Aug. 17, 2010

Industrial Production Rises 1.0 Percent in July
by Daniel Wagner
The Associated Press, Aug. 18, 2010

MAPI Analysis on Industrial Production: Strong Factory Sector Sidesteps Shaky Overall Economic Recovery
by Cliff Waldman
The Manufacturers Alliance/MAPI, Aug. 17, 2010

U.S. Economy: Production Rebounds, Housing Languishes
by Shobhana Chandra and Timothy Homan
Bloomberg News, Aug. 17, 2010

Factories Aid Bumpy Recovery, Housing Still Weak
by Martin Crutsinger and Daniel Wagner
The Washington Post, Aug. 17, 2010

Empire State Manufacturing Survey
Federal Reserve Bank of New York, Aug. 15, 2010