July’s production increased by 0.7% (an increase of 0.3% was expected), following a 0.4% increase in June. At 75.9% in July, capacity utilisation was tangibly higher than in June and may finally be starting to trend upward, though it still signals little in the way of inflationary pressure.
With regard to production by sector, strength was relatively broadly based. Production rose the most for utilities, which accounted for the largest increase (2.1%), though materials production (1.0%) and mining (0.7%) were also robust. If utilities were excluded, production would have been 0.6% higher in the month.
July’s increase in production was helpful, though it still seems like we are just bumping along the bottom. Production is starting to improve, and finally capacity utilisation may be starting to move higher. The strength in the dollar, the collapse in energy prices, political uncertainty, and fears of ongoing economic stagnation all continue to be significant headwinds. Meanwhile, the inventory-to-sales ratio for manufacturers has improved slightly, but is still far above more recent trend levels. Auto production is starting to decelerate after a very strong period, and it is hoped that the recovery in housing and the slow bottoming out in the energy-related areas will help provide enough strength to pick up the slack. Bottom line, this month’s report shows another encouraging increase; however, the sector continues to be negatively affected by the high levels of inventories, the strong dollar, uncertainty, negative sentiment, and the ongoing weakness in global demand.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.