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Wells Fargo Securities Economics Group: Industrial Production Bounces Back in June

Source: Wells Fargo Securities Economics Group

Output Recovers from a Soft May, an Inflection Point for Autos?
The biggest factor in today's increase in output came from manufacturing output, which increased 0.7 percent in June after falling by the same amount the prior month. To some extent this appears to be a bounce-back after a weak May report. Within the manufacturing space, this dynamic is most evident in motor vehicle and parts production. Auto output fell 2.2 percent in May, but picked up 1.9 percent in June.

The motor vehicle space appears to be at an inflection point. In separate reports over the past few weeks we learned that auto sales to dealers were strong, but sales on dealer lots to final consumers were weak in June. Separately, a U.S. Department of Labor spokesperson noted that fewer summer shutdowns at auto manufacturers played a role in last week's drop in initial jobless claims. Our initial impression is that auto dealers may have been caught flat-footed by the deterioration in the labor market and a resulting slowdown in demand for new cars. If that is indeed the case, it would likely keep a lid on further jumps in motor vehicle output in coming months, as softer demand works its way through the production pipeline.

Hot Town Summer in the City, Utilities Down, Isn't it a Pity?
Utilities production fell 1.9 percent in June, which was the largest monthly drop of the year for this series. With all the reports of record breaking scorching temperatures across the country near the end of the month, this may come as something of a surprise. Typically a very hot month leads to increased utility output as air conditioners and fans run longer.

The difference in this case is that it has been so hot for so long. According to the National Weather Service, the 12-month period that ended in June was the warmest average yearly temperature for the nation since record-keeping began in 1895. Utility output comprises only 10.3 percent of overall production, so we do not want to overstate the importance of this small sector. But it bears noting that a return to more normal weather patterns might limit production increases in this category.

Capacity Utilization
Capacity utilization bottomed at 66.8 percent in June 2009, the same time the broader economy bottomed. Since then, utilization has been steadily coming back. Capacity utilization picked up in June, but once again, the gain was made possible by a downward revision to previous data. The 78.9 percent reported capacity utilization in June is a shade softer than the initially reported 79.0 percent in May. The long-run average for capacity utilization is about 80 percent. This means that not only is there still a fair amount of slack in potential output, but there is also little to suggest any inflationary pressure from capacity constraints.
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