Curb your expectations: Production bounce may not last

Summary

Industrial production popped in May amid a bounce in manufacturing. This is a favorable development for the industrial sector, but it's tough to see it as the beginning of sustained strength, as the sector is strapped with headwinds that will limit the pace of recovery.

Industrial sector still finding its footing

The U.S. industrial sector has been in limbo for years, but there have been some signs of life recently. The latest comes from May industrial production, which jumped by the most in ten months, rising 0.9% during the month. Strength was fairly broad-based with each major sector expanding, but the notable standout was in the 0.9% gain in manufacturing production (chart), which accounts for the bulk of industrial activity.

Last month's increase was the second fastest in thirteen months and was enough to lift manufacturing production to the highest level in a year (chart). That's no small feat for an index that has done little more than tread water in recent years. Manufacturing strength cannot be traced to any particular industry either, as most major industries were also higher during the month, with only a handful of relatively small industries registering declines (chart).

Beyond manufacturing, utilities output also jumped 1.6% in May, which was particularly impressive following a 4.1% gain in April. Warmer-than-usual weather across the country the past few months likely continues to stimulate utility demand and production. Mining output also eked out a modest 0.3% gain last month, helping support output.

The largest gain in production by market group came from consumer goods, which rose 1.3%. Considering the moderation in May retail sales, this outturn suggests some potential build in inventories last month, particularly in the area of appliances and furniture, where production rose the most last month, but sales declined.

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