Manufacturing Shows Signs of Steadying as U.S. Oil Slump WanesShobhana Chandra
The most that could be said of American manufacturing is that the worst is probably over.
Factory production was little changed in June for a second month, restrained by a drop in motor-vehicle output that may prove temporary, according to Federal Reserve data issued Wednesday in Washington. Excluding autos, it showed the biggest gain so far this year. Total industrial output climbed 0.3 percent, propelled by advances in mining and utilities.
The plunge in the fabrication of oil-drilling equipment is abating, while factories are starting to churn out more communications gear and other business equipment. That bolsters Fed Chair Janet Yellen’s view, expressed in testimony before Congress, that the economy will be strong enough to warrant raising interest rates this year even as she acknowledged lingering risks from overseas, including Greece and China.
“The weakness in manufacturing is past its peak,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, who correctly projected the overall gain in output. “Domestic demand is certainly growing. Within manufacturing, the weakest part is foreign demand.”
Yellen, in testimony to the House Financial Services Committee, sounded a note of optimism concerning the labor market and economy, saying the U.S. “might snap back more quickly as the transitory influences holding down first-half growth fade and the boost to consumer spending from low oil prices shows through more definitively.”
She added that “economic growth abroad could also pick up more quickly than observers generally anticipate,” and said the central bank remains on track to raise its benchmark interest rate later this year for the first time since 2006.
The Fed’s production report showed the output of motor vehicles and parts decreased 3.7 percent in June after a 2.3 percent increase a month earlier. That’s at odds with auto sales, which just ended their best quarter since 2005.
Industry assembly schedules point to a pickup in auto making this quarter, according to economists at JPMorgan Chase & Co. and Morgan Stanley.
“We feel really good about the current environment,” Katharine Kenny, vice president of investor relations at Richmond, Virginia-based used-vehicle retailer CarMax Inc., said at a June 24 conference.
Manufacturing output excluding automobiles rose 0.3 percent in June, the biggest gain since November, the Fed’s report showed. The production of business equipment increased 0.4 percent, paced by communications gear and semiconductors.
The slump in the energy industry is also abating with production of oil-drilling equipment falling 3.7 percent, the smallest setback so far this year, according to the Fed’s report.
“We are quite encouraged by the non-auto performance, because it is consistent with our view that the downdraft in equipment spending by oil companies is now over, though we need to see another couple of gains to be sure,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd. in Newcastle, U.K., said in a research note.
Adding to the tone of measured improvement in manufacturing, the Federal Reserve Bank of New York’s Empire State factory index for July showed the strongest reading in four months, the branch of the central bank reported Wednesday.
During her congressional testimony, Yellen also reiterated Fed policy makers’ view that inflation will head back toward the central bank’s 2 percent goal in the medium term.
Another report Wednesday also upheld that outlook. Wholesale prices in the U.S. climbed 0.4 percent in June, more than forecast, as fuel costs picked up, according to data from the Labor Department.
“One of the sore spots with the Fed is the continued underperformance of inflation,” Joel Naroff, president of Naroff Economic Advisers Inc. in Holland, Pennsylvania, wrote in a note to clients. Wholesale-price increases are “clearly moving back toward levels that the Fed can live with.”