July Industrial Production

America’s output of physically made goods grew in July according to the Federal Reserve’s Industrial Production report.  Increasing by 0.4 percent, the indicator has improved for six consecutive months and is 5.0 percent higher than its year-earlier level.  Also, capacity utilization ticked up 0.1 percentage point to 79.2 percent, just below the long-term average of 80.1 percent but much improved over July 2013’s tally of 77.5 percent.

Two out of the three industry categories surpassed their June readings.  Mining managed an uptick of 0.3 percent for the month following the 1.3 percent jump in June.  Most importantly, manufacturing jumped 1.0 percent.  Because it is such a large component of industrial production, this uptick offset the 3.4 percent decline in utilities.  Weather seems to have played a significant role in the utilities output as it was milder than usual for July, reducing air conditioning use.  Output by our nation’s utilities has been lower in each month this year except January and May.

Growing industrial production suggests the economy is still expanding.  Manufacturing is particularly sensitive to the business cycle so its sharp monthly increase is most encouraging.  Firms have continued to increase their capacity (up 2.7 percent in the last year) but have done so at a slower pace than output has increased.  This lack of investment by firms could create inflationary issues if demand for industrial wares keeps growing faster than companies increase their ability to produce them.  Of course, if firms accelerate their capital investment, it will add to the economy’s virtuous cycle while diminishing the threat of higher costs associated with adding  labor hours in order to make up for the lack of investment.     (by C. Cox)