U.S. Industry Could Carry the Economy Through the Second Half

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Drilling machines and engines are whirring to life again. Data released by the Federal Reserve on Wednesday showed that the index for industrial production increased by 0.2 percentage points on the month and by 4.3 percentage points on the year in June to 103.9 (the index year is 2007). Manufacturing, which contributes about 75 percent of total production, was up 0.1 point on the month and 6.7 points on the year. All told, the index for industrial production increased 5.5 points in the second quarter, led primarily by growth in mining activities.

The index for mining grew 0.8 percent in June, fueled by a 18.8 percent annual growth rate between April and June, mostly due to a pickup in oil and gas extraction-related activities. According to the Statistical Review of World Energy report published by BP in June, the U.S. recorded the largest growth in the world and the largest annual increment in the country’s history for a second consecutive year in oil production of 1.1 million barrels per day. Meanwhile, the operating rate for utilities declined 0.3 percent in June to 78.7, 7.4 points below its long-run average.

One area where there was some weakness was capacity utilization. Lower-capacity utilization by industries indicates the economy is not running at full throttle yet. Capacity utilization for all industry increased 2.6 points from a year ago to 79.1 percent, which may pick up later as demand comes back. Capacity utilization in the mining sector touched a remarkable 90 percent mark.

The data also show that there is persistent slack in demand for consumer goods, but in June, the output of consumer durables did pick up some pace, growing 0.7 percent. The production of non-energy nondurables gained 0.2 percent. The production of home electronics advanced 4 percent, and the indexes for automotive products, appliances, furniture, and carpeting and miscellaneous goods each moved up between 0.5 and 0.75 percent. Overall, consumer goods production increased 3 percent year on year.

The production of business equipment and construction rose 4.6 percent since June of last year; the index for transit equipment rose at an annual rate of 17.3 percent. The output of industrial and other equipment increased at an annual rate of 10.1 percent. The production of defense and space equipment gained 0.4 percent in June and rose at an annual rate of 4.1 percent in the second quarter.

The Fed estimates that the economy will grow in the range of 2.1 to 2.3 percent in 2014, an estimate that was recently driven lower due to sluggish growth in the first quarter. However, if industrial production continues to grow at the rate it grew this quarter, the economy may catch up to grow as much as the Fed’s March estimate of 2.8 to 3 percent GDP growth.

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