Gut Punch: Drop in Auto Assemblies Holds Back IP

Industrial production fell 0.1 percent in August and capacity utilization slipped to 78.8 percent. A payback in auto assemblies was largely to blame. Ex-autos, manufacturing production increased modestly.

Outright Declines on the Heels of Downward Revisions

Industrial production fell 0.1 percent in August, even as the gain for the month of July was halved. Manufacturing production fell 0.4 percent in August, and there also, the July increase was revised to a smaller gain. Economic indicators for the manufacturing sector have been on a tear in recent weeks. It is puzzling that during August, when the ISM index was signaling the fastest pace of manufacturing activity in three and a half years, that we saw industrial production activity slow. So what happened? 

We highlighted in last month’s write-up that motor vehicle assemblies posted the second-largest one-month jump in 29 years. Payback is no fun. After a 9.3 percent pop in July, industrial production for motor vehicles and parts fell 7.6 percent in August. We noted last month that the absence of summer shutdowns might account for some of the volatility here. Another factor may be the variability of auto sales figures. After dropping off in July, auto sales to dealerships hit an annualized pace of 17.45 million in August—the fastest run-rate since 2006—and retail auto sales surged. The timing of the calendar was such that August had five full weekends, which may have been a factor in the surge, as dealers assured they would not miss out on sales due to a lack of inventory. 

Whatever the cause, the weakness in autos was to blame for the miss in overall output. When you strip out motor vehicles and parts, manufacturing production added 0.1 percent in August. Still, that is hardly the sort of production figure you would expect to see with the ISM index and other surveys at multi-year highs. In a separate release this morning, the New York Fed’s Empire index rose to a five-year high in September. In this survey, the headline number is not derived from the subcomponents but is rather a separate question about general business conditions. 

The underlying components of the Empire survey were mixed. Prices paid went down a few points; the ISM index saw a decline in prices paid for August, so perhaps input price growth will slow again in September. New orders increased, but the number of workers and average workweek slowed. 

Onbalance, our read of today’s report is that production figures still show only slow growth, but we expect to see bigger gains in coming months. It bears noting that utilities posted a 1.0 percent gain in August. This is more indicative of increased activity rather than weather, which in a particularly unusual month can skew utility output. According to the National Weather Service, the nationwide average temperature was a bit below average, though the lower-48 had the coldest August in five years. If anything, that should have softened demand.