The Economy

Industrial Production Remains ‘Tepid’ in May

Output fell a larger-than-expected 0.4% last month despite the dollar's rally fizzling out and a rise in oil prices.
Katie Kuehner-HebertJune 15, 2016

U.S. industrial production fell more than expected in May as even the weakening of the dollar and a rally in oil prices apparently weren’t enough to give the nation’s factories a jolt.

Output decreased 0.4% last month after increasing a downwardly revised 0.6% in April, the Federal Reserve said Wednesday. Economists polled by Reuters had forecast a 0.2% drop in May.

It was the seventh decline in the past nine months for the industrial sector consisting of manufacturing, mining, and electric and gas utilities.

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“It’s a poor report,” Robert Brusca, chief economist at FAO Economics, told MarketWatch. “Industrial production is falling and weak on a broad horizon.”

Declines in the indexes for manufacturing and utilities in May were slightly offset by a small gain for mining, the Fed said. The output of manufacturing moved down 0.4%, led by a large drop in the production of motor vehicles and parts; factory output aside from motor vehicles and parts edged down 0.1%.

The gain of 2% in mining production was the industry’s first increase since August 2015. The index for utilities fell 1.0%.

According to Reuters, the sector “has shown tentative signs of green shoots after a downturn over the past 18 months that was due to weak global demand, a strong dollar and fall in oil prices.” But the May data show that despite the dollar’s rally fizzling out and a rise in oil prices, production “remains tepid across the board.”

“Broadly, with the bulk of the effects from a stronger dollar having worked their way through the system, the factory sector should be stabilizing,” Stephen Stanley, chief economist at Amherst Pierpont Securities, told the Wall Street Journal.

In another discouraging sign, the Fed also reported that capacity utilization, a measure of how much of the nation’s industrial capacity is being used, fell by 0.4% in May, to 74.9%. That matches the level from March, a low not hit since October 2010.

“This is a sign that economic demand, both domestic and international, simply is not strong enough to push economic output to meet it,” the Wall Street Journal said in another article.