Industrial production rises in May from a lower April base

Summary

Short-handed and waiting for deliveries, manufacturing is not growing as fast as it could be. Still, industrial production rose 0.8% in May which exceeded expectations, though a downward revision to prior data saps the joy from the beat. Output in high-tech industries continues to lead the way.

Supply chains still holding up output

Overall industrial production notched a 0.8% gain in May, which was slightly better than expectations. However, the fact that April'sinitially reported gain of 0.7% was revised lower to a pickup of just0.1% spoils the celebration.

The slightly better outturn for May, as well as most of the downward revision, is attributable to manufacturing production which comprises about three-quarters of all industrial output.Manufacturing output rose 0.9% in May after a revision to April'soutput figure changed a 0.4% gain into a 0.1% decline.

Manufacturing continues to contend with supply chain constraints that have left loading docks empty and caused some automakers totemporarily halt production altogether even as other automaker sare ramping back up. That does not fully explain why motor vehicle and parts production dropped 5.7% in April only to fully boun ceback and then some with a 6.7% increase in May. Perhaps the more compelling observation within the motor vehicle space is that despite the possibility that some demand was pulled forward over the past year, demand still exceeds supply. Once supply chains normalize, the production outlook remains positive. Excluding motor vehicles and parts, manufacturing output increased 0.5%.

If I could just get some help

Output among high-tech industries, which include computers,communication equipment, semiconductors and related electronics rose another 1.5% in May. Whereas total manufacturing production is still 0.3% below its pre-pandemic level, output for this group is up more than 16% since February 2020 as the pandemic accelerated the adoption of technology. The need for high-tech goods shows no sign of slowing down even as social distancing falls by the wayside.High tech-output is up at a 22.8% annualized pace the past three months as businesses struggle to find workers and have grown to rely more heavily on technology over the past 15 months.

Overall capacity utilization rose to 75.2%, but we suspect it could be much higher were it not for a number of challenges. If factories had all the input components they needed and did not have problems finding skilled labor to staff the floor, many factories would be humming along at full tilt.

In the May jobs report we learned that manufacturers added 23Kworkers to payrolls, but after shedding 32K factory jobs the prior month, there are fewer people working in manufacturing now than there were in March. The ISM index and many of the regional Fed surveys also report availability of labor as a key challenge.

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