Industrial Production May 2015

Output for physically made goods fell in May 2015 according to the Federal Reserve’s survey of Industrial Production.  The headline figure fell 0.2 percent as two of the three major industry groups declined.  In addition, April’s tally was downwardly revised from -0.3 percent to -0.5 percent after more complete data became available.  Year to date, this indicator has yet to register a reading above zero and has been negative three out of the last six months.

May’s industrial production report makes the economy look rather weak.  The one positive industry, utilities, “bounced back” from a decline of 3.2 percent in April with a positive 0.2 percent uptick.  It only gets worse from here.  Mining fell 0.3 and continued its string of lower monthly tallies, down for the fifth month in a row; it is also down on a year-over-year basis.  Manufacturing, the largest component of the indicator, gave back all of its April gain and then some, falling 0.2 percent after a slight uptick of 0.1 percent a month earlier.  If there is a silver lining in this report, it is that the production of business equipment moved up 0.2 percent, an indication that businesses are investing in capital.

Capacity utilization continued to weaken.   The proportion of potential output dropped for the sixth month in a row, falling to 78.1 percent from 78.3 percent a month earlier.  Some of this drop can be attributed to companies adding to their capacity; it has grown 2.8 percent since May 2014. A declining trend in capacity use tends to be disinflationary, so this development will likely be talked about by our central bankers while they convene over interest rate/monetary policy.

May’s industrial production report disappointed.  This indicator is not paralleling the survey information from the Institute for Supply Management (ISM).  In its latest manufacturing release, firms told the ISM that output is slowing but not contracting.  Industrial production represent a relatively small segment of our economy, but manufacturing tends to be sensitive to the business cycle, so its production should be watched in the months ahead to see if some sort of contraction is developing.       (by C. Cox)