The Federal Reserve reported on Thursday that overall industrial production declined by 0.1 percent in May and that the manufacturing sector, which makes up about 80 percent of the index, dropped for the second time in the last four months. The fall off in manufacturing production was lead by significant declines in machinery and auto production on the durable goods side and as well widespread declines in nondurable industries.
Thursday’s report shows that the economic growth is likely decelerating below potential. I expect that GDP growth will come in below 3 percent in the sencond quarter. While last month’s decline in overall industrial production followed 3 months of growth, the diffusion of the decline is noteworthy. For the first time in more than three years, production of consumer goods, business equipment, construction supplies and business supplies all fell in May. This shows that a broad-based slowdown in the economy is in the making.
The message to the Federal Reserve policy-making committee is as clear as a lighthouse beacon on a cloudless night. With the economy already slowing down, further interest rate increases, which would not impact the economy until 2007, are not needed at this point.
For a quick overview on the economy and manufacturing, check this out!