Hard flex for industrial production, but headwinds remain

Wells Fargo Research Team Wells Fargo

Summary

Manufacturing is still struggling under the weight of higher rates and caution around inventories may limit future gains, but industrial output just posted the biggest back-to-back gains since 2021, enough to hit a fresh cycle high and within striking distance of the all-time high reached in 2018.

Fresh cycle high

Industrial production rose 0.6% in June, handily exceeding expectations and marking the first back-to-back monthly gain in output since 2021. With the first half of the year now on the books, we can say that industrial production has been up three months and flat or down three months but is still up 1.3% on a year-to-date basis.

Factoring in today's reported increase in June, the level of industrial production has finally surpassed its prior peak for this cycle reached in September 2022. This milestone is somewhat less impressive in light of the fact that industrial production as a whole still has not fully returned to its peak in the prior cycle reached in September 2018, but with another month like this one, it will.

Higher rates have clearly had a bigger impact on manufacturing than on the consumer sector. We noted this week how retail sales overtook it's pre-pandemic peak in June 2020; meanwhile, four years on manufacturing is still getting back up. Just the same, today's report is a welcome sign of life for industrial output which has been struggling under the weight of supply chain issues, diminished demand for consumer durable goods and an uncertain trade policy outlook.

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Wells Fargo Research Team

Wells Fargo

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