WASHINGTON (Reuters) – U.S. industrial production rose for a fourth straight month in August, but the recovery is showing signs of strain, suggesting business investment in equipment may remain depressed until the end of the year as the COVID-19 pandemic continues.
Tuesday’s Federal Reserve report added to labor market data that indicated a stall in overall economic activity due to the persistence of the coronavirus and waning fiscal stimulus. The slowing economic recovery, accompanied by warming inflation, is expected to dominate the two-day U.S. central bank policy meeting, which began on Tuesday.
It increasingly appears that the resumption of factory production will come to a halt in the coming months if no one from Washington comes to the rescue with another pandemic stimulus package, Chris Rupkey, MUFG chief economist, told New York. The coronavirus has made the public cautious and this uncertainty is preventing factories from fully reopening.
Manufacturing output rose 1.0% last month after advancing 3.9% in July. The Fed noted that gains for most manufacturing industries have gradually slowed since June. Factory output remains 6.7% below its February level.
Economists polled by Reuters had predicted that manufacturing output would rise 1.2% in August.
Government financial support for businesses and the unemployed has all but dried up, and discussions on another package are at an impasse. At least 29.6 million people were receiving unemployment benefits in August. Government money has been credited for the sharp rebound in economic activity. Cheaper crude oil as a result of the pandemic is also hurting oilfield service and equipment companies.
The International Energy Agency lowered its forecast for 2020 oil demand on Tuesday, warning that the outlook looks even more fragile.
Brent crude is trading around $ 40 a barrel. Business spending on equipment has declined for five consecutive quarters.
A separate New York Fed report on Tuesday showed manufacturing conditions in New York state to further improve in September, but the persistent virus was seen to restrict activity.
Weak demand, supply chain disruptions and fears of a resurgence of the virus will weigh on the recovery of the manufacturing sector until a healthcare solution is discovered and widely available, said Oren Klachkin , Senior US Economist at Oxford Economics in New York.
Wall Street stocks rose as investors sought more stimulus from the Fed. The dollar .DXY was stable against a basket of currencies. US Treasury prices have fallen.
AUTOMOTIVE PRODUCTION FALLS
Last month, the output of durable manufactures rose 0.7%. Motor vehicle production, however, declined 3.7% after accelerating 31.7% in July. There has been an increase in the production of machinery, furniture, computer and electronic products as well as electrical equipment, household appliances and components, goods that complement life under the pandemic.
The production of clothing and leather goods increased, as did the production of plastic and rubber goods.
Higher manufacturing offset declines in mining and utilities production, increasing industrial production 0.4% in August. Industrial production rose 3.5% in July.
Mining production fell 2.5% in August as Tropical Storm Marco and Hurricane Laura triggered what the Fed called sharp but temporary declines in oil and gas extraction and well drilling on the Gulf Coast. Utilities’ output fell 0.4%, with slight declines in electricity and gas utilities.
The capacity utilization of the manufacturing sector, a measure of how well businesses are using their resources, fell from 69.5% in July to 70.2% in August. Overall capacity use for the industrial sector increased to 71.4% from 71.1% in July. It is 8.4 percentage points below its 1972-2019 average.
U.S. central bank officials tend to look at measures of capacity utilization to determine the extent to which the economy is slackening – how far growth has room before it turns inflationary.
A third report released Tuesday by the Ministry of Labor showed that import prices rose 0.9% in August, with goods costs rising overall after accelerating 1.2% in July. Economists had forecast that the prices of imports, which exclude tariffs, would rise 0.5% in August.
Higher import prices reflected further increases in consumer and producer prices in August. But these developments are unlikely to have an impact on monetary policy, as the Fed rewrote its framework last month, placing a new emphasis on the labor market and less on fears of too high inflation.
Last month, prices for imported fuels and lubricants rose 3.3% after advancing 15.1% in July. The prices of imported food products rebounded 0.4% in August after falling 0.9% the month before.
Excluding fuels and food, import prices accelerated 0.7% last month, the largest increase since April 2011, after increasing 0.3% in July. The so-called basic import prices climbed 0.9% during the 12 months of August. Further gains are likely, as the dollar has fallen about 3.6% against the currencies of the United States’ major trading partners since June.
While a few industries are experiencing production bottlenecks, there are large swathes of slack capacity across the economy, which will limit inflation in the near term, said Gus Faucher, chief economist at PNC Financial in Pittsburgh. , Pennsylvania.
Reporting by Lucia Mutikani; Edited by Paul Simao
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