This article is written by PNC Chief Economist Gus Faucher.
- Industrial production rose 0.4%, with a 0.1% increase in manufacturing output.
- Auto production was a big drag in August, but that may be a data issue and not an actual drop in output.
- Industrial production is set to decline in the near term.
- The UAW strike will have only a small effect on output, at least for now.
- Goods inflation has slowed dramatically in 2023, with manufacturers holding less pricing power.
Industrial production rose 0.4% in August, following a 0.7% increase in July (revised lower from 1.0%) and a 0.4% decline in June (revised up from a 0.8% decline). Manufacturing output rose 0.1% in August, hobbled by a 5% decline in output of motor vehicles and parts. Outside of autos manufacturing production rose 0.6%. Mining output was up 1.4% in August due to greater energy production spurred by higher oil prices. Utilities output rose 0.9% with hot weather.
It is unclear how much of the August drop in auto production is real. Auto plants often shut down for retooling in the month, which can make the August numbers volatile even after seasonal adjustment.
After recovering from the pandemic, overall industrial production and manufacturing output have been down slightly over the past year. High interest rates, softer demand for goods after a surge in purchases in the aftermath of the pandemic, and weak global growth have weighed on the manufacturing sector. The ISM manufacturing index has been in contraction for ten consecutive months through August.
Manufacturing output is likely to decline into 2024 as the headwinds to the economy from higher interest rates intensify. Mining output will get a near-term boost from high energy prices, but that is likely to fade. And utilities production will depend on the vagaries of the weather.
The UAW strike will have a limited impact on industrial production, at least for now. Right now, only 14,000 autoworkers are out on strike, affecting one plant apiece for GM, Ford, and Stellantis. But the longer the strike lasts, and the more it spreads, the greater the drag on industrial production and the overall economy.
The overall capacity utilization rate rose to 79.7% in August from 79.5% in July. It has been hovering around 79% throughout 2023, down from above 80% in 2022. The manufacturing capacity utilization rate was at 77.9% in August for the second consecutive month. The manufacturing rate has been around this level in 2023 and is down from close to 80% in early 2022. Supply-chain problems that emerged following the pandemic have largely resolved; this is constraining manufacturers’ pricing power and has slowed goods inflation dramatically this year from 2021 and 2022, contributing to softer overall inflation.
