Industrial production beat estimates

September 15, 2023

August industrial production rose 0.4%, a better outcome than the +0.1% expected; that follows a downwardly revised 0.7% increase in July.

Manufacturing output, which accounts for three-quarters of industrial output, rose just 0.1%. The production of motor vehicles and parts fell 5% in August after rising 5.1% in July. Changes in seasonal plant shutdowns by automakers often result in large swings in output during the summer months. We also saw layoff announcements during the month in the vehicle sector, which likely added to that weakness. Dealers have been reluctant to fully rebuild and carry the additional costs associated with rising rates and vehicle insurance.

Discounting the decline in August motor vehicle output, what’s looming is more concerning. The UAW initiated a limited strike against Detroit's Big Three automakers today, which involves about 13,000 of the union’s 150,000 workers. The strategic strike is intended take down more vehicle production over the course of the next several weeks. The UAW is attempting to limit the number of workers who receive strike pay; furloughed workers are eligible for unemployment insurance while strikers are not.

The longer the duration of the work stoppage and spread of action to other plants would carry negative consequences for the economy.  A strike of short duration could strip GDP growth of several tenths of one percent in the third quarter – a relatively small impact.  A strike that lasts through December would bring the economy to its knees, potentially subtracting 2% from GDP growth in the fourth quarter. That would push fourth quarter GDP growth into the red. States are more vulnerable. Michigan suffered a mini recession during the six-week UAW strike in 2019.

Excluding the weakness in August motor vehicle and parts output, manufacturing production rose a solid 0.6%. Machinery output increased 2% while production of computers and electronics rose 0.9%. Thank GenAI for the latter.

The gain in August industrial production was driven by mining, up 1.4%, which was boosted by a 3.1% rise in oil and gas extraction. Crude oil prices have been on an upswing in recent months. West Texas Intermediate prices have hovered around $90 per barrel, which could spur more drilling activity from improved margins.

Utility output, up 0.9%, was the other key contributor to the August rise in industrial activity. A sizzling summer increased utility usage for cooling with August the ninth warmest August in the 129-year record reported by the National Oceanic and Atmospheric Administration.