Industrial Production Drops 1.2 Percent in August

By September 14, 2012Economy

The Federal Reserve Board said that industrial production decreased 1.2 percent in August, reflecting recent weaknesses in the U.S. and global economic environment. This was a much deeper decline than consensus estimates, which were for a decline of 0.1 to 0.2 percent. Production in the manufacturing sector was down 0.7 percent, with even steeper falls in the mining and utilities sectors (down 1.8 percent and 3.6 percent, respectively).

In the manufacturing sector, durable goods production fell more than for nondurable goods industries, down 1.1 percent versus down 0.4 percent. The biggest drop was in the motor vehicle sector (down 4 percent). Last week, the Bureau of Labor Statistics reported that the auto sector had the largest decline in August in employment (down 8,000 workers), with some indications that at least part of this decline might have been seasonal in nature.

Nonetheless, the decreases in manufacturing production were fairly broad-based, with only the primary metals sector reporting higher activity in August than in July (up 0.6 percent). Aside from motor vehicles, the other manufacturing sectors with large decreases in production included apparel and leather (down 1.7 percent), plastics and rubber products (down 1.6 percent), furniture and related products (down 1.6 percent), wood products (down 1.1 percent), and textile and product mills (down 1 percent).

Meanwhile, capacity utilization also fell. For the larger economy, it shifted from 79.2 percent to 78.2 percent, and for manufacturers, the decrease was from 78.3 percent to 77.6 percent.

Overall, these numbers suggest what we already knew – both anecdotally and from other data. The manufacturing sector has downshifted significantly over the past month or so, with serious concerns about the future of the economy prominent among manufacturers’ minds. With slowing global growth and anxieties related to the fiscal cliff and the domestic economy moving into 2013, U.S. production activity is moving in the wrong direction.

Perhaps this is why the Federal Reserve acted so deliberately yesterday by pursuing another round of quantitative easing. In opting to pursue QE3, the Fed said that it worried about long-term prospects for the economy.

With that said, the latest industrial production figures should also increase the calls for U.S. policymakers to deal with fiscal challenges that are hampering growth, as well. We need to act sooner rather than later, as the uncertainties surrounding the failure to act are already damaging the economy. The latest NAM/IndustryWeek Survey of Manufacturers illustrates this, with nearly 79 percent of manufacturers worried about the fiscal cliff and the number of them saying that they were “somewhat negative” in their outlook doubling in just three months.

Chad Moutray is chief economist, National Association of Manufacturers.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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