Industry Market Trends

Industrial Output Climbs in Second Quarter

Jul 17, 2012

Despite signs of a general slowdown in the U.S. factory sector, industrial production increased in June and for the second quarter as whole, indicating continued resilience in business performance, particularly in manufacturing.

Industrial production in the United States edged up 0.4 percent in June, following a 0.2 percent decline in May, according to the U.S. Federal Reserve today. The latest month-over-month gain also marked year-over-year growth, with the June 2012 total climbing 4.7 percent above the total for June 2011. For the second quarter as a whole, industrial output rose 2.2 percent, compared to 5.8 percent growth in the first quarter.

The Fed's latest industry report indicates that manufacturing production rose 0.7 percent for the month and offset a 0.7 percent decline in May. For the second quarter of 2012, manufacturing output rose at a 1.4 percent annual rate, largely due to a boom in motor vehicles and parts production, which climbed 18.2 percent. However, the pace of growth for the quarter was a significant decrease from the 9.8 percent annual growth rate for the first quarter of the year.

"The pickup in manufacturing may temper concerns of a bigger slowdown in the industry that has spearheaded the three-year-old expansion," Bloomberg News notes. "At the same time, factories face the challenges of a weakening global economy and an American consumer hobbled by 8.2 percent unemployment and stagnant income growth."

Although factory production has risen 15.5 percent above its recessionary low, reached in June 2009, it remains 2.9 percent below the pre-recession peak achieved in June 2007. Last month's manufacturing output index was 5.6 percent above the prior-year level, while manufacturing capacity utilization inched up 0.4 percent to 77.7 percent.

Mining production also increased in June, climbing 0.7 percent after experiencing no change in May. For the second quarter as a whole, however, mining output declined at an annual rate of 1.2 percent. Utilities output fell 1.9 percent in June, following a 2.8 percent gain in May. Yet utilities output surged for the quarter, climbing 14.9 percent.

Overall industrial production in June reached 97.4 percent of its 2007 average, while overall capacity utilization increased 0.2 percentage points in June to total 78.9 percent, a rate just 1.4 percentage points below the long-run average for 1972-2011.

Within manufacturing, the largest gains last month were in durable goods production, which rose 0.8 percent following a 0.6 percent contraction in May. In June, machinery output jumped 2.3 percent, and motor vehicles and parts production climbed 1.9 percent. For the second quarter as a whole, durable goods manufacturing grew at a 6.2 percent annual rate, down from the 16.3 percent rate during Q1.

Business equipment also posted significant gains, with output rising 1.6 percent in June after ticking upward 0.1 percent in May. The overall index for business equipment grew at an annual rate of 11.6 percent in Q2, down from 17 percent in Q1.

Despite the recent improvements, there are numerous signs of concern for industrial business prospects in the short-term future. According to the Institute for Supply Management's (ISM) latest manufacturing report, the sector shrank in June for the first time in nearly three years, with significant contraction reported in new orders and exports.

"Demand for exports has weakened in recent months as Europe battles a deep recession and China's economy grows more slowly. U.S. consumers are spending sluggishly, creating less new demand for factory goods. Americans spent less at retail businesses in June for the third straight month..." the Associated Press reports. "It was the first three-month decline for retail sales since the height of the financial crisis. Most other economic data also weakened in the April-to-June quarter. Job growth slowed to a crawl in part because manufacturers hired fewer new workers."

In its newest quarterly Survey on the Business Outlook, released last week, MAPI found that the composite outlook index fell from 65 in March to 61 in June, while the index for current orders fell from 77 to 70 and export orders dropped from 79 to 63 over the same period. As for the future, manufacturers' prospects for U.S. shipments in the third quarter fell from 77 in March to 75 in June, while prospects for overseas shipments plummeted from 77 to 60.

"U.S. manufacturing growth slowed in the second quarter as Europe and China conditions pressured the sector..." MarketWatch explains. "Though sector momentum has waned, the index continued to stand at a level greater than 50, the threshold dividing contraction and expansion."