Industrial Production Firms in May

Output at the nation’s factories and mines more than offset continued weakness at utilities in May as American factories approach normal capacity use.

Manufacturing Output Climbs

The 0.6 percent increase in industrial production for May comes on the heels of a positive revision to the prior month’s data. Taking the revisions into account, this is a better-than-expected report on output, and, combined with the four-year high we saw in a regional Fed survey earlier this morning, the outlook is brightening for the manufacturing sector. Manufacturing production, which comprises roughly three quarters of all output, increased 0.6 percent in May, and a 0.4 percent decline in April was revised to a decline of just 0.1 percent. Part of the strength here was in autos where production picked up 1.5 percent, mirroring strength in May auto sales. 

Utility production fell 0.8 percent in May, extending the losing streak for this category of production to four months. Weather played a role in some of this weakness, but after four straight declines some payback is probably in order next month. Mining activity climbed another 1.3 percent which offset the decline in utilities. 

Capacity Utilization Returning to “Normal”

Capacity utilization jumped to 79.1 percent in May. The average since 1980 is 79.4 percent, though during the previous expansion between 2003 and 2007, capacity utilization averaged 78.9 percent. While we have surpassed the previous cycle average, it is surprising that even 5 years into the current cycle, we remain below our long-run average. At least things seem to be moving in the right direction. Capacity use has been tightening on trend over the past several years. If activity and demand continue to pick up, one of two things is certain: We will either see greater inflation pressures in the industrial sector as capacity tightens, or capital spending will have to pick up at a faster pace than expected in order for unused capacity to remain. 

These Streets Will Make You Feel Brand New

The Empire State Manufacturing Survey from the New York Fed also hit the wire earlier this morning with a June reading of factory activity in New York State. The 19.3 headline reading was a shade stronger than the 19.0 registered in May and is now at the highest level since 2010 when capital spending was still gearing up in the wake of the recession. Unlike some purchasing manager surveys, the headline number in the Empire survey is not a weighted average of the subcomponents; it is a distinct question about general business conditions. 

That said, there were measures of improvement among the various subcomponents. New orders climbed 8 points to 18.4 and the average workweek picked up to 9.7 from 2.2 previously. The only component still in contraction territory is unfilled orders which is just 1.1 points below the line of demarcation.