U.S. manufacturing output unexpectedly weak in May

Output at US factories unexpectedly fell in May, the latest sign of slowing economic activity as the Federal Reserve aggressively tightens monetary policy to keep inflation under control.

The first drop in manufacturing output since January reported by the Fed on Friday follows this week’s announcement of a drop in retail sales last month as well as a sharp drop in housing construction and permits. The weak output also reflects a shift in spending from goods to services.

“It adds to the evidence that the economy is slowing down,” said Andrew Hunter, senior US economist at Capital Economics. “But there is still little activity data to suggest a recession is on the horizon, or to deter the Fed from moving forward with more aggressive policy tightening.”

Manufacturing output fell 0.1% last month after rising 0.8% in April. Economists polled by Reuters had forecast a 0.3% increase in factory output. Production increased by 4.8% compared to May 2021.

The manufacturing sector, which accounts for 12% of the US economy, has been supported by strong demand for goods. But spending is gradually shifting back to services, while Russia’s drawn-out war on Ukraine and China’s zero-tolerance policy against COVID-19 have further entangled supply chains.

A strong dollar due to rising interest rates could make US exports more expensive. The US central bank has raised its key rate by 150 basis points since March.

“Manufacturing activity is likely to face near-term headwinds due to supply chain disruptions from the war in Ukraine and COVID-19 policy in China,” said economist Rubeela Farooqi. Chief in the United States at High Frequency Economics in White Plains, New York.

A New York Fed survey this week showed activity at New York state factories remained weak in June, with unfilled orders falling for the first time in more than a year. Weaker conditions were also reported in the Mid-Atlantic region, with the Philadelphia Fed’s measure of manufacturing activity posting a negative reading this month for the first time since May 2020.

The surprise drop in industrial production in May followed an average growth of almost 1% over three months. Manufacturing output of non-durable goods edged up 0.1%, supported by increases in petroleum and coal products, which offset declines in food, beverage and tobacco products and paper and printing.

But durable goods production fell 0.2%, dragged down by declines in wood products and machinery. Production at auto factories rose 0.7% last month after rising 3.3% in April.

Mining output rose 1.3% after increasing 1.1% the previous month. Utilities output rose 1.0% after jumping 5.5% in April. Solid gains in mining and utilities offset the decline in manufacturing, boosting overall industrial production by 0.2%. Industrial production jumped 1.4% in April.

Manufacturing capacity utilization, a measure of the full utilization of resources by businesses, edged down 0.1 percentage points to 79.1% in May. It is 1.0 percentage point above its long-term average. Overall capacity utilization in the industrial sector rose to 79.0% last month from 78.9% in April. It is 0.5 percentage points lower than its 1972-2021 average.

Fed officials tend to look at capacity utilization measures to find out how much “slack” remains in the economy – how far can growth go before it becomes inflationary.

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