The Shutdown Takes Its Toll on U.S. Manufacturing
Industrial production in the United States sputtered into a slightly higher gear in September. The U.S. Federal Reserve reported on Monday that its index for industrial production (the IPI, which measures output from the manufacturing, mining, electric, and gas industries) increased from 99.5 in August to 100 in September, bringing the index in line with its 2007 average for the first time since the financial crisis.
The growth — o.6 percent on the month — beat expectations for a more modest increase of 0.4 percent but does little to dissipate the bad mojo that has been condensing around the industry over the past few months. Much of the September increase was led by utilities, which can be expected at this time of year, and therefore doesn’t necessarily indicate strong fundamental growth. Manufacturing growth in particular was underwhelming, with the component index climbing just 0.1 percent on the month instead of the 0.3 percent expected by economists.
The total index for industrial production has climbed 3.2 percent on the year, while manufacturing is up 2.6 percent. Capacity utilization — a measure of how fully potential production is being capitalized on — increased to 78.3 percent from 77.9 percent, up 1.8 percentage points on the year but still below the long-run average of 80.2 percent.
The news is good, but not great, and suggests that between the already anemic broader economic recovery in the U.S. and the partial government shutdown, fourth-quarter gross domestic product is likely to come in on the low side of estimates. Underwhelming industrial production data are just the latest in a series of reports from the manufacturing sector that all point in this direction.
On Friday, the U.S. Census Bureau reported that excluding transportation equipment (mostly non-military aircraft), new factory orders for durable goods contracted 0.1 percent in September. The flash reading of Markit Economics’ U.S. Manufacturing Purchasing Managers’ Index – which is an advance reading based on about 85 percent of total PMI survey responses — registered just 51.1 for the month, down from 52.8 in September.
“The flash PMI provides the first insight into how business fared against the backdrop of the government shutdown in October, and suggests that the disruptions and uncertainty caused by the crisis hit companies hard,” said Markit chief economist Chris Williamson. “The survey showed the first fall in manufacturing output since the height of the global financial crisis back in September 2009.”
Output — arguably the most highly watched component of the headline index — fell dramatically, from 55.3 in September to 49.5 in October, indicating contraction. The index for new orders declined from 53.2 in September to 51.6 in October, signaling reduced demand that could negatively impact the industry moving forward. Markit reports that a number of manufacturers linked lower output to the downward trend in new orders.
Manufacturing, already beleaguered by the weak recovery, tripped over the partial shutdown and looks like it will stumble its way through the fourth quarter. A rebound of activity in November is entirely possible, but, as Williamson points out, “It is impossible to disentangle the impact of the shutdown from other factors that might have been at play during the month, so equally impossible to judge the extent to which business might bounce back.”
With headwinds – fiscal or otherwise – howling, most economists expect that the Fed will continue to delay tapering asset purchases. The Federal Open Market Committee, responsible for quantitative easing, is meeting on Tuesday and Wednesday, and will issue a statement on Wednesday afternoon, at the conclusion of the meeting.
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