WASHINGTON: U.S. manufacturing output increased more than expected in August, boosted by a surge in machinery and primary metals production, but the outlook for factories remains weak against the backdrop of trade tensions and slowing global economies.
The fairly upbeat report from the Federal Reserve on Tuesday came as officials from the US central bank were due to gather for a two-day policy meeting. Fears that the year-long trade war between the United States and China could derail the longest economic expansion in history are expected to compel the Fed to cut interest rates again on Wednesday.
The economy is in its 11 th year of expansion. The Fed lowered borrowing costs in July for the first time since 2008.
Manufacturing production rose 0.5per cent last month after an unrevised 0.4per cent drop in July, the Fed said. Economists polled by Reuters had forecast manufacturing output rising 0.2per cent in August.
Production at factories fell 0.4per cent in August on a year-on-year basis. Manufacturing, which accounts for about 11 per cent of the US economy, is being hobbled by the U.S.-China trade dispute. The trade war has eroded business confidence, leading to a slump in the sector, which ironically the Trump administration has sought to protect against what it has called unfair foreign competition.
While the so-called hard data showed a rebound in manufacturing output last month, the trend is likely to remain soft, with sentiment surveys still downbeat. A survey early this month showed a measure of national manufacturing activity contracted in August for the first time since August 2016.
Another survey from the New York Fed on Monday showed a measure of business activity in New York state slipped in September. Manufacturers in New York state were also less upbeat about business conditions over the next six months, with a measure of capital expenditures dropping to a three-year low.
Manufacturing is also weakening as the boost from last year US $ 1.5 trillion tax package fades. Cuts in the production of Boeing’s 737 MAX aircraft, which was grounded indefinitely in March following two deadly crashes, are also adding to manufacturing’s malaise.
The weakness in manufacturing mirrors a slowing domestic economy. The Atlanta Fed is forecasting gross domestic product rising at a 1.8per cent annualized rate in the third quarter. The economy grew at a 2.0per cent pace in the April-June quarter, stepping down from the first quarter’s 3.1per cent rate.
US financial markets were little moved by the data as investors awaited Wednesday’s rate decision.
INVENTORY OVERHANG
Manufacturing has also been hurt by an inventory overhang, especially in the automotive industry. Motor vehicles and parts production fell 1.0per cent last month after increasing 0.5per cent in July. A strike by about 48 , 000 General Motors workers could further dent motor vehicle production, but much would depend on the duration of the work stoppage, which started after midnight on Sunday.
Excluding motor vehicles and parts, manufacturing output increased 0.6per cent in August after declining 0.5per cent in the prior month. Machinery output rebounded 1.6per cent after dropping 1.7per cent in July. Primary metals production increased 1.3per cent. There were also gains in furniture and computer and electronic products output.
The jump in manufacturing output in August together with a 1.4per cent rebound in mining, lead to a 0.6per cent increase in industrial production last month. That was the largest gain in industrial output since August 2018 and followed a 0.1per cent dip July. Industrial production rose 0.4per cent on year-on-year basis in August.
Oil and gas well drilling fell 2.5per cent last month, declining for a second straight month. Energy firms have been cutting spending on new drilling to focus more on earnings growth instead of increased output. This has contributed to weakness in business investment, which contracted in the second quarter for the first time in three years.
Utilities output increased 0.6per cent last month.
Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, increased to 75. 7per cent in August from 75 .4per cent in July. Overall capacity use for the industrial sector rose to 77 .9per cent from 77. 5per cent in July.
It is 1.9 percentage points below its 1972 – 2018 Average. Officials at the Fed tend to look at capacity use measures for signals of how much “slack” remains in the economy – how far growth has room to run before it becomes inflationary.
(Reporting By Lucia Mutikani; Editing by Andrea Ricci)
GIPHY App Key not set. Please check settings