Industry Market Trends

Industrial Production Down in August

Sep 20, 2012

Production at U.S. factories, mines and utilities declined steeply in August, largely due to the severe impact of Hurricane Isaac on the Gulf Coast region, as well as a significant drop in automotive output.

Industrial production in the United States decreased 1.2 percent in August after posting 0.5 percent growth in July, according to the U.S. Federal Reserve. Last month's decline was the largest in over three years, raising concerns about the economic outlook and strengthening the case for the Fed's recent decision to introduce another round of stimulus to boost growth.

The size of the decrease in output at factories, mines and utilities last month exceeded expectations, as economists polled by MarketWatch had forecast production to fall by only 0.3 percent in August. July's growth was also revised down to 0.5 percent from a previously reported 0.6 percent increase.

In August, mining - which includes gas and oil production - fell by 1.8 percent, as precautionary shutdowns of oil and gas rigs in the Gulf of Mexico in advance of Hurricane Isaac drove down output. The Fed estimates that last month's hurricane contributed approximately 0.3 percentage points to the overall decline in production.

Meanwhile, utilities output decreased 3.6 percent. At 96.8 percent of its 2007 average, total industrial production in August was 2.8 percent above the prior-year level.

Total industry capacity utilization, which measures how much of the country's industrial production capabilities are in use, dropped by 1 percentage point to 78.2 percent, a rate 2.1 points below the 1972-2011 average.

Factory output, which accounts for roughly 12 percent of the U.S. economy and is the largest segment of industrial production, declined 0.7 percent in August after gains of 0.4 percent in both June and July. Last month marked the steepest drop in manufacturing production in five months.

"Manufacturing helped lift the country out of the Great Recession, but it slowed in the spring as consumers cut back on spending, businesses invested less in machinery and demand for U.S. exports was hurt by a global weakness," the Associated Press notes. "The weakness in manufacturing in August was widespread. Production fell at factories making machinery, computers, airplanes and furniture."

The Fed's report indicates that much of the decline in manufacturing last month was due to a slowdown in automotive production, which fell 4 percent. Excluding the automotive category, manufacturing output fell 0.4 percent in August. Despite the contraction, motor vehicle production remains relatively strong, standing 18.5 percent higher than the total for August 2011.

"The latest results on car purchases have been more encouraging," Bloomberg News reports. "Autos, a source of manufacturing strength, sold at a 14.46 million annual rate last month, the fastest since the surge in August 2009 tied to the government's 'cash-for- clunkers' program. They were up from a 14.05 million pace in July..."

Apart from the automotive category, manufacturing losses were widespread, with production declining in 17 out of 20 major manufacturing industries, while two remained flat and only one - primary metals - posted gains in August.

The labor market may be another drag on production. Manufacturing lost 15,000 jobs in August, while the national unemployment rate has remained above 8 percent since February 2009, impeding consumer spending rates and draining confidence. In addition, a slowdown in global markets and lingering political uncertainty are likely to cause continued weakness in the near-term future.

"One month manufacturing production is up, the next it's down, and on average it's relatively flat. The problem is that consumers are constrained by slow income growth, and the potential engine of strong growth - business equipment investment - is slowing down," Daniel Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), explains. "With the recession in Europe becoming worse and the political gridlock in this presidential election year making resolution of the fiscal cliff more problematic, manufacturing is unfortunately decelerating down to the stall speed of the general economy."