– October 17, 2019
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Industrial production fell 0.4 percent in September, following a 0.8 percent gain in August. The September fall is the second drop in three months. Over the past year, industrial production is down 0.1 percent. Total capacity utilization decreased 0.4 percentage points to 77.5 percent as capacity posted a 0.2 percent gain for the month.

Manufacturing output, which accounts for about 75 percent of total industrial production, fell 0.5 percent after rising 0.6 percent in August. Manufacturing output is also down in two of the past three months, resulting in a 0.9 percent drop over the past year (see bottom chart), the worst performance since 2016.

Mining output posted a 1.3 percent decline for the month while utilities output rose 1.4 percent in September. Over the past year, mining output is up 2.6 percent while utilities output is up 1.2 percent.

Manufacturing-sector weakness was led by a sharp fall in production of motor vehicles, primarily related to a strike at a major manufacturer. Total motor vehicle and motor vehicle–parts production was down 4.2 percent for the month as vehicle assemblies fell to 10.71 million at a seasonally adjusted annual rate from 11.26 million in August. Most segments of vehicles showed declines for the month with automobile assemblies falling to 2.57 million, light trucks falling to 7.77 million, and medium and heavy trucks holding at 0.37 million. Primary metals fell 1.6 percent while machinery production fell 1.4 percent. Over the past year, motor vehicle production is off 5.4 percent while primary metals were down 3.3 percent and machinery production is down 2.9 percent.

The drops in motor vehicle, primary metals, and machinery production dragged total durable-goods production down 0.7 percent while nondurable-goods production was off 0.2 percent for the month. Among nondurable-goods producers, chemicals (12.7 percent of total industrial production and 35.7 percent of nondurable goods) fell 0.5 percent while food-products production (11.3 percent of total output and 31.8 percent of nondurables) rose 0.2 percent. These two categories account for two-thirds of nondurable-goods output.

Measured by market segment, consumer-goods production was down 0.2 percent in September, with consumer durables off 1.9 percent and consumer nondurables up 0.3 percent. Business-equipment production fell 0.7 percent in September while construction supplies were unchanged for the month.

Materials production (about 46 percent of output) decreased 0.5 percent for the month and is up 0.2 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 fell 0.6 percent for the month and is down 1.4 percent from a year ago.

Manufacturing-capacity utilization dropped to 75.3 percent in September, down 0.4 percentage points from 75.7 percent in August.

Housing construction activity was weaker in September as total starts fell by 9.4 percent and permits for future construction fell 2.7 percent. Total housing starts dropped to a 1.256 million annual rate from a 1.386 million pace in August.

The dominant single-family segment, which accounts for about three-fourths of new home construction, rose 0.3 percent for the month to a rate of 918,000 units, marking the fourth gain in a row (see top chart). Starts of multifamily structures with five or more units sank 28.3 percent to 327,000, pushing activity to the lower end of the 300,000 to 450,000 range that multifamily starts have been in for much of the last two economic expansions (see top chart). From a year ago, total starts are up 1.6 percent, with single-family starts up 4.3 percent and multifamily starts off 5.8 percent.

Among the four regions in the report, total starts fell in all four regions: The Northeast (−34.3 percent), the Midwest (−18.9 percent), and the South (−4.0 percent), and the West (−1.9 percent). For the single-family segment, starts fell in three regions but were up 7.1 percent in the South, the largest region by volume.

For housing permits, total permits fell 2.7 percent to 1.387 million from 1.425 million in August. Single-family permits rose 0.8 percent to 882,000 in September, the fifth monthly gain in a row (see top chart). Within the multifamily segment, permits for two- to four-family units were off 16.7 percent and permits for five or more units fell 7.5 percent to 470,000. Permits for single-family structures are up 2.8 percent from a year ago while permits for two- to four-family structures are down 14.6 percent and permits for structures with five or more units are up 20.8 percent over the past year.

Overall, single-family housing activity has posted a modest rebound over the last several months following a period of weakness from early 2018 through early 2019. The sharp drop in mortgage rates may be providing a bit of a tailwind, but there is little evidence to suggest a significant and sustainable acceleration in single-family housing activity in coming months and quarters. Activity levels remain at or below the typical levels during prior expansions over the past 35 years.

Multifamily housing remains generally robust, sustaining activity at levels consistent with the prior two economic expansions. However, given the high level, it’s unlikely that it can go much higher. Therefore, total residential investment is unlikely to be a significant and sustained source of growth for the economy.

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Robert Hughes

listpg_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.
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