US industrial production fell by 0.1% in August following downwardly revised gains of 0.3% and 0.2% in June and July (previously reported as 0.4% in each month). The latest reading disappointed market expectations for a 0.3% increase in the month. The decline reflected a 0.4% drop in manufacturing output as the durables component fell by 0.9% to offset a 0.2% increase in non-durables industries. The former reflected a 7.6% decline in motor vehicles output, which retraced much of a 9.3% increase in July. Volatility in July and August motor vehicle production likely reflected difficulty seasonally adjusting the data around the summer retooling period. Mining output was up 0.5% in August following a downwardly revised 0.3% decline in July (previously reported as a 0.3% increase), which broke a string of steady gains in the sector. The utilities index rose by 1.0% in the month, although this only partially retraced declines of 2.0% and 2.7% in June and July as a slow start to summer weather limited demand for air conditioning.
The decline in overall industrial output pushed the August capacity utilization rate downward to 78.8% from 79.1% in July (previously reported as 79.2%), which had matched a cycle high.
Today's reported decline in manufacturing activity was disappointing but largely reflected weaker motor vehicle output following an outsized increase in July, with volatility in the last two months likely due to seasonal adjustment issues. Outside of this factor, the underlying trend seems to indicate that one of the drivers of recent above-potential growth in the US economy has maintained momentum into the second half of 2014. With the manufacturing index in July and August sitting at an annualized 3.5% above its second-quarter 2014 average, this sector looks set to make another strong contribution to growth in the third quarter. By the same measure, overall industrial production is up 2.2% in July and August because weaker utilities output, due to a cooler than usual summer, and slower growth in mining activity provided some offset to the solid gain in manufacturing. Despite some disappointment on the headline, today's industrial production data remain consistent with our forecast for GDP to increase at an above-potential pace of 3.3% in the third quarter.
RBC Financial Group
The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.
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