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 | Industrial Production Declined 0.2% in May |
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| Posted Under: Data Watch • Industrial Production - Cap Utilization |
Implications: Industrial production was soft in May, with overall production declining 0.2%, the sixth consecutive month without a positive gain. A combination of factors held down production in May, more than fully offsetting a 1.7% jump in auto output. Due to the lagged effect of lower oil prices, the index for "oil & gas drilling and servicing" declined 7.9% in May and is now down a whopping 51.2% from a year ago. As a result, the mining component of industrial production fell by 0.3% in May. The good news is that energy prices appear to have stabilized, so mining output should soon bottom out. And if energy prices bounce at all, mining will bounce as well. Taking out mining and utilities gives us manufacturing, which was down 0.2% in May, due to declines outside the auto sector. However, one of the weakest components was petroleum and coal products, which is often very volatile and doesn't appear directly related to the drop in drilling equipment, which would have showed up in machinery. Also, lingering parts shortages due to the West Coast port strikes may still be hampering production at some firms. If so, that's another reason to expect a bounce in production in the months ahead as supply channels improve. It's also important to recognize that despite recent softness, overall industrial production as well as manufacturing ex-autos are still up a respectable 1.4% from a year ago and the fundamentals favoring further growth remain in place. Companies are sitting on huge cash reserves and profits are close to record highs. In addition, at 78.1%, capacity utilization remains close to the average of 78.6% over the past twenty years, so further gains in production will give companies an incentive to build out plants and buy equipment. In other manufacturing news today, the Empire State index, a measure of manufacturing sentiment in New York, came in at -2 in June versus +3.1 in May.
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These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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