Seasonal auto production and heatwaves distorted July data.
August 16, 2023
Industrial production surged 1% in July, the largest increase since January of this year when it also rose by 1%. July’s outcome beat consensus expectations for a 0.3% rise. June industrial output was revised lower to -0.8% from -0.5%.
All three industry groups contributed to the strength in July output. Manufacturing production rose 0.5% as a 5.2% jump in motor vehicle and parts production contributed to the bulk of the gain. Excluding motor vehicle and parts, manufacturing output rose only 0.1%.
The summer months of June, July and August are typically shutdown periods for U.S. automakers. Some retool their plants in June, others in July or August. The rise in July motor vehicle output can be considered a rebound from June when it fell 3.9% as some initiated their shutdowns earlier in the summer.
Utility output jumped 5.4% with electric usage up 6.7% and natural gas down 2%. Blame continuously running air conditioners for higher electric demand. The average temperature during July was 76.4°F, 2.8°F above the 20th century average; it was the third warmest in the 128-year record reported the National Oceanic and Atmospheric Administration. The Federal Reserve, which reports industrial production, noted that higher temperatures in July raised demand for cooling.
Mining output rose 0.5% after two months of declines. In July, West Texas Intermediate crude oil prices reached $82 per barrel, the highest in nine months and likely spurred drilling activity due to better break-evens.
Production tied to business investment rose in July, aided by subsidies for semiconductor chip and electric vehicle plants. Business equipment output rose 1% and information processing increased 0.5%.
Defense and space equipment output rose 1%, the third consecutive month of an increase of 1% or better, due to higher military spending associated with the Russia-Ukraine war.
On an annual basis, total industrial output fell 0.3% in July after -0.7 in June and -0.1% in May.
We remain guarded about the outlook for the overall industrial sector.
The headline figures are less rosy than they appear. We saw a rebound in activity due to catch-up in vehicle production and blistering heat. Federal government subsidies for strategically important sectors and the war in Ukraine contributed to those gains. However, the manufacturing sector is declining on an annual basis. Purchasing managers' indexes (PMIs) remain below 50, which indicates that manufacturing activity is contracting. Until the PMIs move above 50, we remain guarded about the outlook for the overall industrial sector.