Industry Crib Sheet: Manufacturing Drives July Industrial Production
August 18, 2014
Metalworking Equipment Demand Gains in June July Retail Spending Falls Flat on Weaker Auto Sales Small Business Confidence Ticks Up Slightly in July U.S. industrial production expanded 0.4 percent in July, the same pace as in June, as strong gains in the manufacturing sector overcame a 3.4 percent drop in utilities production and a mild 0.3 percent expansion in mining output. The headline production figure The 1 percent expansion in manufacturing production was the biggest jump in four months and the largest monthly increase since a 1.3 percent spike in February, according to the Federal Reserve. The Fed, in its July report, revised June's industrial production figure from its 0.2 percent advance reading to 0.4 percent, and upgraded June's manufacturing output by two-tenths of a point to 0.3 percent. The agency once again lowered May's manufacturing reading in its second revision, from a 0.4 percent rise to 0.3 percent growth. The report shows the nation's industrial output basically held steady over the last three months, with manufacturing progressing through the second quarter at 3 percent growth per month. Utilities output has been in decline since February, while the mining sector has produced uneven results this year. Analysts attributed the big decline in utilities output last month to comparatively mild weather for July. Millan Mulraine, economist at TD Securities, said strong numbers for business spending in the Fed data could point to "a self-sustaining growth path" for the economy, as reported by the Wall Street Journal The available slack in durable goods manufacturing is even tighter, where an operating rate of 78.6 percent is 1.6 points above the long-run average. Manufacturers, overall, are working on record volumes of backlogs and shipments, and in July, according to Labor Department statistics, added 28,000 workers Manufacturing in July rode the strength of motor vehicle production, which spiked 10.1 percent, the highest monthly rise in five years, though factory activity at car-making plants could see a curtailment in the coming months as both factory orders and auto sales have slumped (see story below). Consumer goods production rose 0.5 percent, accelerating from 0.2 percent growth in June (which was revised from being flat), while output of business equipment jumped 1.3 percent, reversing the previous month and representing the largest gain in five months. Earlier this month, the Institute for Supply Management also reported that manufacturing accelerated in July Metalworking Equipment Demand Gains in June Both metalworking machinery and cutting tool orders took strong upturns in June, rebounding from declines the previous month. Machinery bookings jumped 12.6 percent, while cutting tool consumption rose 7.3 percent from May. The $450.7 million in orders for metalcutting and sheet fabrication machinery reported by the U.S. Manufacturing Technology Orders "Order gains in June were driven by two factors -- the end of the quarter and continued strength in key customer industries, especially automotive, aerospace, medical, and energy," said Doug Woods, president of AMT The USMTO headline figure tracks in line with the Commerce Department's June factory orders Meanwhile, the Federal Reserve on Friday released its latest industrial production report that shows total output of the manufacturing sector rose 0.3 percent in June, which was upgraded from a 0.1 percent preliminary reading (see story above). According to the Fed's initial assessment of July, manufacturing activity spiked 1 percent. June cutting tool purchases of $181 million were the strongest so far in 2014 and up 9.9 percent year-over-year, suggesting manufacturers are ramping up production output. A leading indicator of metal part manufacturing activity, cutting tool consumption has been up three of the last four months, and demand levels are higher than those earlier in the year. Tom Haag, president of the U.S. Cutting Tool Institute, which produces the Cutting Tool Market Report with AMT, said the strong month of June sets the stage for 2014 order levels to surpass last year. July Retail Spending Falls Flat on Weaker Auto Sales The pace of retail sales slowed to a virtual standstill in July, dampening hopes for a strong start to third-quarter consumer spending and a strengthening U.S. economy. According to statistics from the Commerce Department "What we've seen so far in the third quarter has been a little underwhelming," Paul Ballew, chief economist for Dun & Bradstreet, told ABC News The data show that Americans remain cautious with their spending, despite healthy job growth Retail sales growth peaked in March with a 1.5 percent monthly gain, benefiting from a winter buildup, but have slowed down ever since. Still, economists remain expectant that consumer spending will pick up, saying pressure on wage growth will come from the improving job market. "Consumer confidence measures are improving, and credit is more easily available. Falling gasoline prices in recent weeks will put more money in consumers' pockets to spend on other goods and services," said PNC Financial Services economists Stuart Hoffman anvd Gus Faucher in a USA Today report Despite being stronger year-over-year, auto sales in July once again fell, after a 0.3 percent drop in June, which went unchanged from the Commerce Department's earlier estimate. Sales at furniture and home furnishings stores declined 0.1 percent following a 0.2 percent decrease in June, as did sales at electronics and appliance stores. Spending at home improvement retailers plummeted from June's 1 percent expansion to just 0.2 percent growth. At department stores, the 0.4 percent sales gain in June was wiped out by a 0.5 percent drop last month. Large retailers have seen uneven month-to-month sales so far this year. Outlays at clothing stores grew 0.4 percent, following a downgrade of June's figure from 0.8 percent growth to just a 0.2 percent advance. Small Business Confidence Ticks Up Slightly in July Small businesses upgraded their business outlook slightly in July as sales and earnings held close to seven-year highs, according to the National Federation of Independent Business. The NFIB's Small Business Optimism Index According to the NFIB data, small business confidence peaked to a six-year high in May but remains historically low. "As long as these stats continue to hold, the small business half of the economy will continue to not be able to pull its weight," said Bill Dunkelberg, NFIB's chief economist, referring to the gains being seen in other sectors of the economy. Following a 4 percent GDP expansion in the second quarter, gained mostly on accumulation of stocks by businesses, economists are forecasting the third quarter to grow by 3 percent. Dunkelberg said that historically weak sales are preventing small business owners from partaking in the inventory investment that is happening at the national level, adding that they have had difficulty liquidating old inventory. Last month, the small business sector generated a net gain in employment, continuing a streak that is now at 10 straight months. Job creation plans continued to strengthen, rising 1 point to a seasonally adjusted net positive 13 percent, the best reading since September 2007. More than half of business owners (53 percent) have hired new employees in the past three months. The number of small businesses expecting greater sales volumes was net 10 percent, 1 point lower than the previous month, while the percentage of businesses reporting higher nominal sales in the past three months also ticked down a point to net negative 3 percent. Still, the NFIB says the latter is one of the best readings since 2007. Capital spending by small shops continues to be "mediocre," according to the NFIB, with 55 percent reporting outlays in July, up 1 point from the previous month. Less than a quarter of owners have business investments planned for within the next six months. The trade group notes that the 10 percent of owners who said now is the time to expand is considered low for a period of growth, despite the sub-index rising 3 points last month. Owners who expect that the economy will improve rose 4 points but were still outnumbered by those who felt otherwise by a margin of 6 percent. Dunkelberg said he expects the small business sector to remain stagnant in the third quarter.