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PNC Chief Economist Gus Faucher: Big Jump in Industrial Production in July

pncfsg Croppedwith Strong Details, Huge Increase in Auto Output

  • Industrial production rose a very strong 0.8% in July, with a huge 11.2% increase in auto production. Production is now back to its pre-pandemic level.
  • Production difficulties appear to be fading, and continued strong demand and the need to rebuild inventories will support near-term growth in the industrial sector.
  • A rising capacity utilization rate will give firms more pricing power.

Industrial production rose a very strong 0.9% in July from June, with even stronger details. This was much better than the consensus expectation for an increase of 0.4%. Manufacturing output was up 1.4% over the month, with mining production up 1.2%. Utilities output fell 2.1% after the end of the heatwave that gripped much of the country, reducing electricity demand compared to June.

After falling a combined 17% in March and April of last year, industrial production is now just 0.2% below its pre-pandemic level, and manufacturing output is actually above where it stood in February 2020.

Growth in industrial production in June was revised somewhat lower, to 0.2% from 0.4%. Industrial production has increased in four of the past five months.

There was a huge 11.2% increase in production of motor vehicles and parts over the month, with the automakers canceling or reducing their traditional July shutdowns in response to very strong vehicle sales and earlier production problems. Outside of May, June, and July of last year, when the industry was reopening after pandemic-caused shutdowns, the July 2020 increase was the largest one-month jump in auto production in more than 20 years. But the Federal Reserve reported that despite this big jump, semiconductor shortages continued to weigh on auto production over the month. Manufacturing output excluding autos and parts was up a strong 0.7%.

The overall capacity utilization rate jumped to 76.1% in July from 75.4% in June. The manufacturing capacity utilization rate rose to 76.6% in July, from 75.5% in June. The overall capacity utilization rate has almost recovered to its pre-pandemic level, while the manufacturing rate is actually higher than it was in early 2020. However, both rates are still somewhat below their peaks during the previous business cycle, in mid-2018.

Industrial production soared in July, with strong details. Utilities output dropped because of the weather, but there were large increases in both manufacturing and mining production over the month. Manufacturers, especially auto manufacturers, are trying to keep up with strong demand. The automakers canceled their usual July shutdowns to churn out cars and trucks, with a huge increase in seasonally adjusted output. Even so, the computer chip shortage continues to weigh on auto production.

But it appears that supply-chain disruptions for many manufactured goods are gradually fading. Inventories for most goods are extremely low given strong demand and limited supply, so output growth will continue as supply chains continue to normalize and manufacturers try to catch up. Mining output increased sharply in July due to high oil prices and strong demand from transportation; these will remain drivers of growth over the next few months as energy producers increase output to take advantage of high prices. Utilities output will be a positive for production growth in August as another heatwave grips parts of the U.S.

The rising capacity utilization rate will give businesses a bit more pricing power. Inflation will slow in the second half of this year as temporary price pressures abate as the economy adjusts to the big shifts in supply and demand in the wake of the pandemic. But inflation in 2022 and 2023 is set to be at or somewhat above the Federal Reserve’s 2% average objective.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.

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