Source: Wells Fargo Securities, LLC Economics Group
Industrial Sector Is Firming
Coming off a flat reading in May, industrial production rose 0.3 percent in
June. The gain was in line with market expectations and, while modest,
marked the best print for the sector since February. Encouragingly, output
in the manufacturing sector strengthened. Recent weakness in the
manufacturing sector, which accounts for about three-quarters of industrial
output, had been weighing heavily on total output. Production in the
manufacturing sector rose 0.3 percent over the month, while May’s print
was revised up a tenth. The auto sector continues to stand out. With sales
to dealers having increased to their best pace since before the recession, it
was not surprising to see the solid 1.3 percent increase in motor vehicles
production in June.
The manufacturing sector also looks to be benefiting from a more
optimistic consumer. After having fallen the previous two months,
production for finished consumer goods rose 0.5 percent in June. While
autos pushed up production of consumer durables, nondurables output
rebounded a bit from negative readings in the prior two months as well.
Business investment is also looking firmer, with business equipment up
0.5 percent and business supplies ticking up in June.
Utilities output fell for the third consecutive month, with May production
revised lower to a drop of 2.8 percent. June utilities output fell much more
moderately, 0.1 percent, as a drop in natural gas production outweighed a
0.1 percent increase in electricity output. After having fallen in the first
quarter, mining production continued its second quarter advance in June
and finished the quarter at a 4.9 percent annualized rate.
Industrial Production Set to Improve a Bit in Coming Months
We expect to see industrial production pick up a bit over the coming
months. Utilities look likely to flatter next month’s production numbers as
temperatures have heated up across much of the country. In addition,
today’s print on manufacturing output supports our view that activity in the
factory sector is firming. Purchasing managers’ indexes (PMIs) for June
generally improved, although many still hover near their breakeven marks.
The Empire State Manufacturing Index, the first of the July PMIs, suggests
factory activity may perk up further in July. The headline rose only
1.6 points, but underlying details were stronger with notable improvement
in shipments and new orders. That said, a substantial pickup in activity that
will contribute to GDP in a meaningful way remains elusive. Global growth
is still relatively weak, with conditions no longer worsening in Europe but
flagging in China. Moreover, GDP growth of around 2 percent will likely
keep many businesses relatively cautious with their investments. We look
for industrial production to quicken to around a 3 percent annual pace in
the third quarter.