Industry Crib Sheet: Industrial Production Edges Up in June
July 21, 2014
U.S. industrial production grew a modest 0.2 percent in June, in the latest sign that the nation's economy is progressing at a measured rather than an accelerating pace. Manufacturing, the largest contributor to industrial output, ticked up just 0.1 percent in June, while capacity utilization declined by one-tenth of a point after rising for four straight months. June's headline industrial number also fell short of economists' 0.3 percent growth projection.
The latest report by the Federal Reserve shows that the nation's industrial output, while still expanding, slowed down significantly last month. The Fed also lowered May's industrial output to a 0.5 percent expansion rate from the initially reported 0.6 percent.
April's industrial output was better than first reported, however, as total production was revised upward to be flat with March instead of a 0.3 percent decline. The Fed also revised April's manufacturing output from negative 0.1 percent to 0.3 percent growth, but manufacturing in May was adjusted from 0.6 percent to 0.4 percent.
The revisions cast further light on a second quarter that was inconsistent. Despite several months of strong jobs growth, other major economic indicators such as retail sales, construction spending, and factory orders have shown mixed results, as well. The Fed's manufacturing numbers for June mirror those reported earlier by the Institute for Supply Management, showing that the sector continued to expand for the fifth straight month but at a significantly slower pace.
Still, the Fed reports that manufacturing rose at an annual rate of 6.7 percent in the second quarter, following the lackluster 1.4 percent in the first quarter that was impacted by severe winter weather. Total industrial output, which also accounts for utilities and mines, advanced at an annual rate of 5.5 percent in the second quarter. But the modest gains in June could put a crimp on the bounce-back from the first quarter, which saw a negative GDP of 2.9 percent.
"Overall, the industrial economy is in reasonable shape, but the recovery is steady rather than spectacular," said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in the Wall Street Journal.
Michael Montgomery, an IHS Global Insight economist, cautioned to WSJ that continued sluggish consumer spending might not be able to support the current pace of production. Retail sales in June rose a mere 0.2 percent (see story below). "The manufacturing sector cannot keep boosting goods output at an accelerated pace unless someone buys them," he said.
Consumer goods production was flat in June, and for the second quarter, consumer goods manufacturers raised output by annual rate of 1.1 percent. Production of motor vehicles and parts shrunk 0.3 percent, the first contraction since January. That was partially offset by a 4 percent surge in the production of home electronics.
Growth in business equipment, an indicator of spending and investment by the private sector, was more encouraging, rising at an annual rate of 9.2 percent from April through June, despite only a 0.1 percent expansion last month. Output of industrial equipment, including machinery, declined 0.3 percent..
Mining output grew by 0.8 percent in June, while utilities contracted by 0.3 percent.
A 10 percent decline in U.S. demand for metalworking machinery in May represented the second straight month of slowing sales, though the drop was milder when compared with the previous month. Meanwhile, May cutting tool consumption by the nation's manufacturers fell 3.5 percent.
The nearly $352 million in total bookings for metalcutting and sheet fabrication machinery in May were $40 million less than April and 17.5 percent lower than the same month in 2013. Machinery orders had fallen 20.4 percent in April after a bookings surge in March, as manufacturers began adjusting back to more normal conditions following pent-up activity caused by the deep winter slowdown. After another month of slowing purchases, the $1.97 billion in year-to-date machinery orders has fallen behind 2013's pace.
"Expectations for the 2014 manufacturing technology market were for a soft first half of the year, followed by a stronger second half," said Doug Woods, president of the Association For Manufacturing Technology, which publishes the monthly U.S. Manufacturing Technology Orders report. "The PMI continues to stay above 50," Woods said, referring to the Institute for Supply Management's manufacturing index. "We expect continued investments in capital expansion through year's end."
The USMTO figures reflect the drop in the Commerce Department's May factory orders indicators for industrial machinery released earlier in the month.
May cutting tool purchases totaled $169 million, down $6 million compared with the previous month. The figure was 4.4 percent lower than the same month last year. Cutting tool demand serves as a proxy for metal manufacturing activity.
"Overall cutting tools shipments were down in May despite many other manufacturing indicators being positive in the same period," said Brad Lawton, chairman of AMT's Cutting Tool Product Group. "This down month should be taken in context with that other data and an upward three-month trend."
The May decline in cutting tool orders ended two consecutive months of rising consumption, but demand levels remain higher than those earlier this year.
Retail sales in June grew a sluggish 0.2 percent, as consumer spending veered away from car purchases and toward clothing, department store goods, and electronics. An unexpected 0.3 percent decline in auto sales put the brakes on better retail sector gains, indicating that Americans are still making cautious purchasing decisions.
Excluding the drop in auto sales, retail sales rose 0.4 percent. June was a reversal of fortune for car dealers and other retailers, as strong automobile purchases in recent months had primarily sustained consumer spending, which accounts for 70 percent of the nation's economic output. Instead, weaker car buying hampered retail growth from gaining momentum after the Commerce Department revised May's retail sales growth to 0.5 percent, better than the initially reported 0.3 percent advance.
Analysts said the latest figures show Americans continue to make trade-offs in their buying, blaming weak wage growth, despite the surge in hiring by U.S. employers in recent months. "It's about as good as you can hope for given where you are in terms of household incomes," Ian Shepherdson, Pantheon Macroeconomics' chief economist, said to Wall Street Journal.
Compromises in household spending were reflected in the sharp 1 percent decline in receipts at building material and home-improvement stores while clothing retailers rebounded strongly from a 0.5 percent sales drop in May with a 0.8 percent expansion in June. Outlays at general merchandise stores, including department stores, bounced back, as well. But total retail activity finished way below economists' median forecast of a 0.6 percent increase.
"I think it's going to continue to be slow and steady," True Value CEO John Hartmann commented to WSJ. "We may be in an economic expansion, but because of the severity of the recession, consumers remain more cautious with the precious dollars they have to spend."
But because of an abysmal winter that significantly restrained consumers from visiting shops and merchants, total sales from April through June, excluding food, still were up 2.4 percent over the first quarter. All 13 major retail categories experienced positive second-quarter sales growth. That prompted economists to readjust their second-quarter GDP forecasts back to a median 3 percent, which would offset the 2.9 percent contraction in domestic output in the first quarter.
Still, Federal Reserve Chair Janet Yellen said slow wage growth and low labor-force participation are preventing the central bank from scaling back further its post-recession economic stimulus, as Bloomberg reported. "Although the economy continues to improve, the recovery is not yet complete," Yellen commented.