Decent Industrial Production Report

The 0.3 percent gain in June industrial production was slightly better-than expected and was made possible by increases in utilities and mining. A drop in autos held back an otherwise good month for manufacturing.

Hot Town Summer in the City

All of the gains in today’s industrial production report came from utilities and mining, but there is plenty going on under the surface in manufacturing. The 1.5 percent pickup in utility production in June likely came from a pickup in demand for both electricity and natural gas (to generate electricity) to power air conditioners. Record heat waves hit some parts of the country during the month and, according to the U.S. weather service, the average temperature in June was the second hottest in the 121-year period of record.

Mining Bounce

Mining output picked up 1.0 percent. The increase comes after several months of declines and even with today’s bounce, production in mining is still off 4.2 percent since January. Since the economy emerged from recession six years ago this month, mining output has been the clear driver of industrial production growth despite the fact that it comprises a relatively small share of overall output (about 16 percent at present). The decline in oil prices in the second half of 2014 is reflected in the recent weakness we have seen this year in mining output.

Manufacturing: Why Are Car-Makers Hitting the Brakes

Manufacturing is the heavyweight component in this report, comprising roughly three quarters of industrial production, and output here has been flat in back-to-back months. The placid headline figures belie a lot of action beneath the surface.

After three-straight monthly gains in output for motor vehicles and parts, auto production dropped 3.7 percent in June. The timing of summer autoplant shutdowns has been shifting or going away altogether in recent years and may be affecting the seasonal adjustment process. It may also simply reflect automakers pulling back the throttle on production, as wholesale and retail auto sales did slow slightly in June. After three straight months of gains in this category, some payback can be expected. But given the magnitude of the decline here we suspect there is more to the story than right-sizing production to a modest slackening in demand.

Without help from motor vehicle assemblies, manufacturing production has been essentially flat or slightly negative every month of the year so far. The bright spot for the manufacturing sector in this report is that when we strip away motor vehicles and parts, manufacturing output had its best month since November 2014.

On Tuesday of next week, the Federal Reserve will issue its annual revisions to the industrial production data which will reclassify industry groups to the 2012 NAICS standards and incorporate other new data.