U.S. industrial production rebounded in July, the Federal Reserve reports, allaying some fears about the economy losing momentum in the second half of the year.
Industrial output in the United States increased in July at the fastest pace in seven months, as new data from the Federal Reserve indicates that the automotive sector bounced back from supply disruptions wrought by Japan’s devastating earthquake in March.
The 0.9 percent increase in production at factories, mines and utilities last month marked the largest gain since December 2010. The median forecast of 85 economists surveyed by Bloomberg projected a 0.5 percent rise in production for July.
“Part of the jump in manufacturing reflects a rebound from the supply shock caused by the earthquake in Japan, indicating it will be difficult for factories to maintain this pace of output as consumer spending and exports cool,” Bloomberg News reports. “At the same time, companies have kept inventories lean, limiting the need for large-scale cuts that could trigger an economic slump.”
Excluding autos, manufacturing climbed 0.3 percent, pointing to resilience in the sector that has been the economy’s main pillar of support.
“While motor vehicle production and output from utilities account for much of the improvement in the industrial production index, the expansion of manufacturing production was fairly widespread, with 14 of the 20 major manufacturing industries showing improvement from June to July,” Don Norman, an economist for the Manufacturers Alliance/MAPI, wrote in an analysis of the Fed data. “The growth of manufacturing production has decelerated this year, reflecting the marked slowdown in the economic recovery during the first seven months of 2011, but it clearly continues to expand and will likely outpace growth in GDP this year and next.”
The advance in overall industrial production also reflects a 1.1 percent output increase by mines and, in particular, a 2.8 percent jump in output by utilities in response to the heat wave affecting much of the U.S.
“The report suggests that the economic slowdown earlier in the year may be subsiding, despite worries about weak consumer demand,” the Wall Street Journal reports (subscription required). “The recovery may have regained some momentum in recent months, and it could go some way in easing fears of an impending recession,” TD Securities analyst Millan Mulraine told the Journal.
While forecasters have lately been reporting a higher risk of recession than they did just a couple of months ago, the strong industrial production data may help dampen fears of a double dip.
“It is hard to think we are on the eve of destruction when manufacturers are ramping up production,” Joel Naroff, president of Naroff Economic Advisors, said in a note to clients.
In addition to the positive sense from the July numbers, production in June was revised up to a 0.4 percent gain from the prior estimate of a 0.2 percent increase and output in May was also revised higher.
“The key question is whether the increase can be sustained in future months,” MarketWatch explains.
The news isn’t completely positive, however, as the increased output over the past year has reduced the number of factories and machines that are sitting idle, which is potentially bad news for the inflation outlook.
The capacity utilization rate for total industry climbed to 77.5 percent, a rate 2.2 percentage points above the rate from a year earlier and the highest level in nearly three years. However, the boost in overall output meant that the capacity utilization is 2.9 percentage points below its long-run (1972-2010) average.
Third-quarter gross domestic product growth is now being tracked at a 2.2 percent annual rate, up from 1.3 percent in the second quarter and 0.4 percent in the first quarter.
Industrial Production and Capacity Utilization
Board of Governors of the Federal Reserve System, Aug. 16, 2011
Industrial Output in U.S. Climbs, Easing Concern on Manufacturing Recovery
by Jillian Berman and Shobhana Chandra
Bloomberg News, Aug. 16, 2011
Analysis on Industrial Production: Motor Vehicles, Utilities Lead Increase
by Don Norman
Manufacturers Alliance/MAPI, Aug. 16, 2011
Cars Drive an Increase in Output by Factories (subscription required)
by Sudeep Reddy
The Wall Street Journal, Aug. 17, 2011
Economists’ Outlook Darkens: See 30% Chance of Recession
by Paul Davidson and Barbara Hansen
USA Today, Aug. 14, 2011
US Output Surges as Japan Quake Impact Eases
by Lucia Mutikani
Reuters, Aug. 16, 2011
Industrial Output Jumps in July on Auto Strength
by Greg Robb
MarketWatch, Aug. 16, 2011
Macroeconomic Advisers Sees Q3 GDP at 2.2%
by Mark Gongloff
MarketBeat (The Wall Street Journal), Aug. 16, 2011