The final noteworthy economic report of the week was released this morning, and much like the last several economic data points was not an encouraging read. Specifically, the Federal Reserve, at 9:15 A.M. (EDT), reported that industrial production for the month of May fell 0.1% after rising 1.0% in the prior month. The report was a clear sign that manufacturing was slowing. Such sentiment was echoed earlier this month, when the Institute for Supply Management said that manufacturing activity, though still expanding, was growing at a more moderate pace.
The primary culprit behind the May shortfall in the production of durable goods orders was a cutback in automobile manufacturing. The production of automotive products fell 1.9%, the first monthly decline since November. The output of appliances, furniture, and carpeting decreased 0.5%, while home electronics were unchanged. Meanwhile, the production of nondurables decreased 0.2% in May, its third consecutive month without a gain. The capacity utilization rate fell 0.1% in May, to 78.4, a rate 2.5 percentage points below its long-run average.
The dour industrial production report was further compounded today by a disappointing reading from the Federal Reserve Bank of New York’s Empire State Index. The survey of manufacturers fell sharply to 2.3, from 17.1 in May—a reading below zero would indicate contraction.
The recent disappointing data on manufacturing activity should not come as a big shock, since consumers are spending less—retail sales fell 0.2% in both April and May—and business are purchasing fewer capital goods. Demand for high-priced computers and machinery fell in both March and April. Our sense is that an improvement in these areas may be hard to come by over the next few months, especially with job creation slipping notably in recent months. The nation added a paltry 69,000 new jobs in May. Until more individuals find work, spending on big-ticket items will probably remain subdued—and manufacturing activity is likely to reflect such thinking on the part of the consumer.
All in all, there was not much to like about this latest report on the U.S. manufacturing sector. And, like other recent economic releases, it may force the central bank to revisit its stance of further monetary stimulus. The Federal Open Market Committee will meet for two days commencing on Tuesday to discuss such matters.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.