Industrial production falls despite downward revisions

Summary

Today brought a batch of manufacturing data that was rather grim. Regional manufacturing surveys from the New York and Philadelphia Fed were both in contraction territory in August and industrial production fell in July with downward revisions to prior data.

Tough timing for the utilities comeuppance

We'd say, “Let's get the bad part out of the way,” except that would not leave us with much to discuss. The July industrial production report was a disaster, but not an unmitigated one at least, more on that in a second. Manufacturing production was down 0.3%, mining output was flat amid refinery shutdowns due to Hurricane Beryl and utilities production fell 3.7%. In our June industrial production note, we said “at some point there will be a comeuppance when utility output reverts to the mean.” This is it.

To the extent there is a mitigating factor for manufacturing it is that the weakness is entirely in the manufacture of motor vehicles and parts. That category cratered 7.8% in July alone. Over the past year, motor vehicle production is off 9.4%. The trend normalization underway in the sector has included a few dreadful months like this over the past year. As supply chains heal and orders stabilize, we'd expect to see the ever-present volatility in this sector abate somewhat.

Elsewhere, manufacturing categories were all positive. Machinery output rose 1.4% after a sharp decline the prior month and computer & electronics output rose 1.5%.

While manufacturing activity continues to do little more than tread water, the overall business spending environment has held up reasonably well as firms have prioritized the software over equipment this cycle. This has allowed overall capex spending to move ahead even as manufacturing production flags. This is evident in some major manufacturing categories tied to the space, such as computer & electronic products. While overall manufacturing production is up just 0.1% over the past year, computer & electronics are up nearly 4%, and when adding semiconductors and communications equipment these high-tech categories annual growth is north of 7%.

The 'deferment' mindset that has been used to describe today's consumers looks more evident in manufacturing investment. Faced with uncertainty around the timing and degree of Fed easing and the results of the U.S. presidential election, there is little incentive for firms to take on major projects today with the promise of more clarity tomorrow. This overall sector slowdown was evident in measures of capacity. Manufacturing capacity pulled back last month, with the largest decline coming from the auto space. This is consistent with the overall decline in manufacturing weekly hours worked in July, which remain near the lower-end of the post-pandemic range.

Manufacturing activity continues to flash recessionary signals, but other data, including July retail sales, suggest some portions of the economy can continue to chug along even as manufacturers face a more precarious environment. To the extent that the struggles in the manufacturing sector in particular and the labor market more broadly stem from policy that is too restrictive, there is still scope for the Fed to move quickly to relieve that constraint.

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