Non-Manufacturing Leading the Way
The initially reported 1.2 percent decline in August industrial production was revised to a drop of 1.4 percent. After taking that revision into account, today’s 0.4 percent gain was roughly in-line with consensus expectations for a 0.2 percent increase.
The details are less encouraging. While it is certainly preferable to see small gains rather than the outright declines in output that we saw in August, the biggest increases in today’s report were in non-manufacturing parts of the industrial landscape. The 1.5 percent increase in utilities output was partly a reflection of a warm September, but is also a function of low base-effects. Utilities production plunged 4.3 percent in August, making some payback here in September an easier feat than it would have been without the drop in the prior month.
To some extent the same dynamic was behind the 0.9 percent gain in mining output, where a 1.6 percent drop in August set up the gain this month. It bears noting here that the gains in both of these sectors were not enough to offset the declines in August, leaving the level of output for both categories below their respective July levels.
What About the Factory Sector?
After falling 0.9 percent in August, manufacturing output edged higher in September, clawing back about a quarter of the output lost in the prior month. At this month’s pace of improvement, it could take until the end of the year before we return to the July level of industrial output in the factory sector.
Various survey data offer a conflicting assessment of the state of American manufacturing. In September, a number of regional Federal Reserve Bank surveys signaled trouble for future output. The Empire State manufacturing survey, the Philadelphia Fed Index and the Texas manufacturing survey were all in contraction territory. On the other side of the ledger, the headline manufacturing ISM—the authoritative national factory survey— returned to slow growth territory after three months in contraction. Also positive in September were the Richmond and Kansas City Fed surveys.
Given the weakness we have seen in recent orders data, and the lack of conviction in these surveys, we are forecasting 0.1 percent growth in industrial production in the third quarter. Essentially this is neither growth nor expansion for the factory sector; manufacturing is merely going sideways. Business spending on capital expenditures was a key driver in the early stages of the current expansion, but the boost from business spending has slowed. At a time when the economy needs all the help it can get, business spending is stalling.