Industrial Production Rose in August but the Trend Remains Weak
Industrial production increased 0.6 percent in August, following a 0.1 percent drop in July. Over the past year, industrial production is up 0.4 percent (see top chart). The gain helped push capacity utilization up by 0.2 percentage points to 78.1 percent as capacity posted a 0.2 percent gain for the month.
The gain in industrial production was supported by increases in all three major sectors: manufacturing, mining, and utilities (see top chart). Manufacturing-sector output, which accounts for about 75 percent of total industrial production, rose 0.5 percent for the latest month, mining output (about 15 percent of output) was up 1.4 percent, and utility output (about 10 percent of total production) increased 0.6 percent.
Within manufacturing, durable-goods production rose 0.5 percent, matching the gain for nondurable-goods production. Leading the durable-goods production higher were machinery (up 1.6 percent), primary metals (up 1.3 percent), and nonmetallic mineral products (up 1.1 percent). On the downside, motor vehicle production posted a 1.0 percent decrease as unit assemblies fell to an 11.21 million-unit annual rate versus an 11.64 million pace last month.
From a year ago, durable-goods production is up a very modest 0.7 percent, with categories showing a nearly even mix of gains (6 industries have gains from a year ago) and losses (4 industries have declines from a year ago).
Among nondurable-goods producers, plastics and rubber posted the strongest gain, rising 2.6 percent, while apparel- and leather-products production fell 1.2 percent. Chemicals products and food products, the two largest segments, had partially offsetting results, with chemicals rising 1.1 percent and food production falling 0.1 percent.
Measured by market segment, consumer-goods production (about 28 percent of total production) rose 0.2 percent in August, with consumer durables down 0.2 percent and consumer nondurables up 0.3 percent. Business equipment (about 10 percent of production) rose 1.0 percent in August and is up 0.4 percent from a year ago. Within business equipment, the monthly gain was boosted by a 1.7 percent gain in industrial equipment. Construction supplies increased 0.9 percent for the month and is up 1.0 percent over the past year.
Material production (about 46 percent of output) increased 0.9 percent for the month and is up 0.6 percent from a year ago. The energy component has been a major source of volatility in this category, particularly following the collapse of energy prices in mid-2014. The non-energy component rose 1.3 percent for the month and is up 3.4 percent from a year ago.
Despite the gain in August, overall industrial production is up very modestly versus a year ago. Additional evidence of the weak condition of the industrial sector comes from the diffusion indexes of industrial production. These indexes measure breadth of gain across industries. The diffusion indexes are calculated as the percentage of series that increased over a certain time span (one, three, or six months) plus one-half the percentage that were unchanged. The diffusion indexes for August were all below 50 percent and have been weak for most of 2019 (see bottom chart).
The August report on industrial production provides further evidence that the sector remains weak. Though industrial output has been shrinking as a share of the economy for many years, the industrial sector remains significant. Persistent weakness represents a vulnerability for the overall economy.
Robert Hughes
Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
