U.S. manufacturing output increased more than expected in August, boosted by a surge in machinery and primary metals production, but the outlook for factories remains weak against the backdrop of trade tensions and slowing global economies.
The fairly upbeat report from the Federal Reserve on Tuesday came as officials from the U.S. central bank were due to gather for a two-day policy meeting. Fears that the year-long trade war between the United States and China could derail the longest economic expansion in history are expected to compel the Fed to cut interest rates again on Wednesday.
The economy is in its 11th year of expansion. The Fed lowered borrowing costs in July for the first time since 2008.
Manufacturing production rose 0.5% last month after an unrevised 0.4% drop in July, the Fed said. Economists polled by Reuters had forecast manufacturing output rising 0.2% in August.
Production at factories fell 0.4% in August on a year-on-year basis. Manufacturing, which accounts for about 11% of the U.S. economy, is being hobbled by the U.S.-China trade dispute. The trade war has eroded business confidence, leading to a slump in the sector, which ironically the Trump administration has sought to protect against what it has called unfair foreign competition.
While the so-called hard data showed a rebound in manufacturing output last month, the trend is likely to remain soft, with sentiment surveys still downbeat. A survey early this month showed a measure of national manufacturing activity contracted in August for the first time since August 2016.
Another survey from the New York Fed on Monday showed a measure of business activity in New York state slipped in September. Manufacturers in New York state were also less upbeat about business conditions over the next six months, with a measure of capital expenditures dropping to a three-year low.
Manufacturing is also weakening as the boost from last year’s $1.5 trillion tax package fades. Cuts in the production of Boeing’s (BA) 737 MAX aircraft, which was grounded indefinitely in March following two deadly crashes, are also adding to manufacturing’s malaise.
The weakness in manufacturing mirrors a slowing domestic economy. The Atlanta Fed is forecasting gross domestic product rising at a 1.8% annualized rate in the third quarter. The economy grew at a 2.0% pace in the April-June quarter, stepping down from the first quarter’s 3.1% rate.
U.S. financial markets were little moved by the data as investors awaited Wednesday’s rate decision.
Manufacturing has also been hurt by an inventory overhang, especially in the automotive industry. Motor vehicles and parts production fell 1.0% last month after increasing 0.5% in July. A strike by about 48,000 General Motors (GM.N) workers could further dent motor vehicle production, but much would depend on the duration of the work stoppage, which started after midnight on Sunday.
Excluding motor vehicles and parts, manufacturing output increased 0.6% in August after declining 0.5% in the prior month. Machinery output rebounded 1.6% after dropping 1.7% in July. Primary metals production increased 1.3%. There were also gains in furniture and computer and electronic products output.
The jump in manufacturing output in August together with a 1.4% rebound in mining, lead to a 0.6% increase in industrial production last month. That was the largest gain in industrial output since August 2018 and followed a 0.1% dip July. Industrial production rose 0.4% on year-on-year basis in August.
Oil and gas well drilling fell 2.5% last month, declining for a second straight month. Energy firms have been cutting spending on new drilling to focus more on earnings growth instead of increased output. This has contributed to weakness in business investment, which contracted in the second quarter for the first time in three years.
Utilities output increased 0.6% last month.
Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, increased to 75.7% in August from 75.4% in July. Overall capacity use for the industrial sector rose to 77.9% from 77.5% in July.
It is 1.9 percentage points below its 1972-2018 average. Officials at the Fed tend to look at capacity use measures for signals of how much “slack” remains in the economy — how far growth has room to run before it becomes inflationary.
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