U.S. industrial production unexpectedly dipped 0.6% in January, with across-the-board weakness raising alarms that the economy has hit a “soft patch.”
The decline in output, which appears to reflect rising protectionism and decelerating economic growth around the world, was the first since May 2018. Economists had expected a gain of 1%.
Motor vehicle and parts production slumped 8.8% last month, the largest drop since May 2009, when the economy was in recession. But even stripping out automobiles, manufacturing output decreased 0.2% in January.
Manufacturing accounts for about 12% of the U.S. economy. Adding to a sense of weakness in the Federal Reserve’s January report, industrial production in December was cut to a 0.1% gain from the initial estimate of a 0.3% increase.
“It looks like Fed officials were smart to stop their gradual rate hikes as the economy seems to have entered a soft patch,” Chris Rupkey, chief economist at MUFG in New York, told Reuters.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said manufacturing is “under real pressure from the slowdown in China and the trade war, and we expect output to drift down over the first half of the year, putting the sector into a mild recession.”
“This won’t kill the rest of the economy, but it won’t look good, either, and until the sector bottoms out in the late spring it will make the Fed’s recent dovish turn look like the right move,” he added.
According to the Fed, “The large drop in the output of motor vehicles and parts contributed significantly to sizable decreases posted by consumer durable goods, transit equipment, and durable materials.”
Automakers have been cutting back on production to manage bloated inventories of some models in anticipation of declining sales this year. Production is also dropping as some plants are changing over to new models.
In addition, Reuters said, a strong dollar and cooling growth in Europe and China are hurting exports while lower oil prices are also slowing purchases of equipment for oil and gas well drilling.