Utilities place drag on production

June 17, 2025

Industrial production dropped a more-than-expected 0.2% in May, after rising an upwardly revised 0.1% in April. A sharp 1.6% decline in utility usage more than offset a strong 0.5% jump in manufacturing activity. Utility usage is down after a surge due to unusually bad winter weather, notably in the South and follows a jump in usage in April.

Gains in big-ticket durable goods production offset declines in non-durable goods. A 3.8% rebound in motor vehicles and parts drove gains. We saw a pickup in home electronics and appliances. Producers who bought components ahead of tariffs are now liquidating inventories. That helped to buffer the tariff toll that is showing up in surveys of manufacturers. Nondurable goods fell in most categories.

Business equipment was another bright spot, fueled by a rise in transportation (ex auto) and defense and space equipment. The aerospace industry is still catching up on production lost to a major storm last year. Materials production edged lower, with an increase in consumer parts offsetting a sharp drop in energy.  That has curbed the jump in activity due to deregulation in the oil sector intimated by the administration.

Mining edged up a bit but is only back to the level hit in March. The challenge for oil producers is the lower price we saw in the Spring, which slipped below breakevens on new wells.

Gains in industrial production were less dispersed than they were one and three months ago, suggesting some cracks in the foundation of production activity. Recent surveys on manufacturing activity remain much weaker than the hard data suggest and are being tempered by concerns about how tariffs will impact costs and demand for goods once their full effects kick in.

The Federal Reserve has begun its two-day meeting on policy today. Once you look under the hood, there is little reason for the Fed to cut interest rates to shore up economic activity.