U.S. manufacturing production rises in August, but momentum slowing

By Lucia Mutikani WASHINGTON (Reuters) - U.S. factory production increased for a fourth straight month in August, but the recovery is showing signs of strain, suggesting business investment in equipment could remain depressed through the end of the year as the COVID-19 pandemic drags on. The report from the Federal Reserve on Tuesday added to data on the labor market that has indicated a stall in overall economic activity because of the coronavirus' persistence and fading fiscal stimulus.

Reuters September 16, 2020 00:06:54 IST
U.S. manufacturing production rises in August, but momentum slowing

US manufacturing production rises in August but momentum slowing

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. factory production increased for a fourth straight month in August, but the recovery is showing signs of strain, suggesting business investment in equipment could remain depressed through the end of the year as the COVID-19 pandemic drags on.

The report from the Federal Reserve on Tuesday added to data on the labor market that has indicated a stall in overall economic activity because of the coronavirus' persistence and fading fiscal stimulus. The ebbing economic recovery, accompanied by firming inflation, is likely to dominate the U.S. central bank's two-day policy meeting, which started on Tuesday.

"It is looking increasingly like the recovery in factory production will stall in coming months if no one from Washington is going to ride to the rescue with another pandemic stimulus package," said Chris Rupkey, chief economist at MUFG in New York. "The coronavirus has made the public cautious and this uncertainty is keeping factories from opening back up completely."

Manufacturing production rose 1.0% last month after advancing 3.9% in July. The Fed noted that "the gains for most manufacturing industries have gradually slowed since June." Factory output remains 6.7% below its February level.

Government financial aid to businesses and the unemployed has virtually dried up, and talks on another package are at an impasse. At least 29.6 million people were on unemployment benefits in August. Government money was credited for the sharp rebound in economic activity. Cheaper crude oil because of the pandemic is also hurting oilfield services and equipment firms.

The International Energy Agency on Tuesday slashed its 2020 oil demand forecast, warning "the outlook appears even more fragile ... the path ahead is treacherous amid surging COVID-19 cases in many parts of the world."

Economists polled by Reuters had forecast manufacturing output would rise 1.2% in August.

Business spending on equipment has declined for five straight quarters and could remain under pressure because of lower oil prices.

Stocks on Wall Street were trading higher as upbeat data from China revived optimism about an economic rebound and investors looked for more stimulus from the Fed.

AUTO PRODUCTION FALLS

Last month, production of long-lasting manufactured goods increased 0.7%. Motor vehicle production, however, dropped 3.7% after accelerating 31.7% in July. There were increases in the output of machinery, furniture, computer and electronic products as well as electrical equipment, appliances and components.

Production of apparel and leather products increased as did the output of plastics and rubber goods.

The rise in manufacturing offset declines in both mining and utilities output, lifting industrial production 0.4% in August. Industrial output rose 3.5% in July.

Mining production fell 2.5% in August as Tropical Storm Marco and Hurricane Laura caused what the Fed said were "sharp but temporary" drops in oil and gas extraction and well drilling. Utilities output fell 0.4%, with small decreases in both electric and gas utilities.

Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, increased to 70.2% in August from 69.5% in July. Overall capacity use for the industrial sector ticked up to 71.4% from 71.1% in July. It is 8.4 percentage points below its 1972-2019 average.

Officials at the U.S. central bank tend to look at capacity use measures for signals of how much "slack" remains in the economy - how far growth has room to run before it becomes inflationary.

Though capacity use at industries is rising gradually, inflation is warming up. A separate report on Tuesday from the Labor Department showed import prices rose 0.9% last month as the costs of goods increased broadly. Data for July was revised higher to show import prices accelerating 1.2% instead of gaining 0.7% as previously reported.

Economists had forecast import prices, which exclude tariffs, would increase 0.5% in August. In the 12 months through August, import prices fell 1.4% after declining 2.8% in July.

The rise in import prices mirrored further gains in both consumer and producer prices in August. But these developments are unlikely to have an impact on monetary policy as the Fed last month rewrote its framework, putting new emphasis on the labor market and less on worries about too-high inflation.

Last month, prices for imported fuels and lubricants rose 3.3% after advancing 15.1% in July. Petroleum prices gained 2.9% after increasing 16.5% in July. Imported food prices rebounded 0.4% in August after dropping 0.9% in the prior month.

Excluding fuels and food, import prices accelerated 0.7% last month, the largest gain since April 2011, after rising 0.3% in July. The so-called core import prices shot up 0.9% in the 12 months through August.

Further gains are likely, with the dollar falling about 3.6%against the currencies of the United States' major trading partners since June.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

This story has not been edited by Firstpost staff and is generated by auto-feed.

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