An employee works at a shovel factory in Camp Hill, Pennsylvania, the US. Picture: REUTERS/Tim Aeppel
An employee works at a shovel factory in Camp Hill, Pennsylvania, the US. Picture: REUTERS/Tim Aeppel

Washington  – US manufacturing output increased more than expected in August, boosted by a surge in machinery and primary metals production, but the outlook for factories remains weak against the backdrop of trade tensions and slowing global economies.

The fairly upbeat report from the Federal Reserve on Tuesday came as officials from the US central bank gathered for a two-day policy meeting. Fears that the year-long trade war between the US and China could derail the longest economic expansion in history are expected to compel the Fed to cut interest rates again on Wednesday.

The economy is in its 11th year of expansion. The Fed lowered borrowing costs in July for the first time since 2008.

Manufacturing production rose 0.5% August after an unrevised 0.4% drop in July, the Fed said. Economists  had forecast manufacturing output rising 0.2% in August.

Production at factories fell 0.4% in August on a year-on-year basis. Manufacturing, which accounts for about 11% of the US economy, is being hobbled by the US-China trade dispute. The trade war has eroded business confidence, leading to a slump in the sector, which the Trump administration has sought to protect against what it has called unfair foreign competition.

While the so-called hard data showed a rebound in manufacturing output, the trend is likely to remain soft, with sentiment surveys still downbeat. A survey early in September showed a measure of national manufacturing activity contracted in August for the first time since August 2016.

Another survey from the New York Fed on Monday showed a measure of business activity in New York state slipped in September. Manufacturers in New York state were also less upbeat about business conditions over the next six months, with a measure of capital expenditures dropping to a three-year low.

Manufacturing is also weakening as the boost from 2018's $1.5-trillion tax package fades. Cuts in the production of Boeing's 737 MAX aircraft, which was grounded indefinitely in March following two deadly crashes, are also adding to manufacturing's malaise.

The weakness in manufacturing mirrors a slowing domestic economy. The Atlanta Fed is forecasting GDP rising at a 1.8% annualised rate in the third quarter. The economy grew at a 2% pace in the April-June quarter, stepping down from the first quarter's 3.1% rate.

US financial markets were little moved by the data as investors awaited Wednesday's rate decision.

Inventory overhang

Manufacturing has also been hurt by an inventory overhang, especially in the automotive industry. Motor vehicles and parts production fell 1% in August after increasing 0.5% in July. A strike by about 48,000 General Motors workers could further dent motor vehicle production, but much would depend on the duration of the work stoppage, which started after midnight on Sunday.

Excluding motor vehicles and parts, manufacturing output increased 0.6% in August after declining 0.5% in the prior month. Machinery output rebounded 1.6% after dropping 1.7% in July. Primary metals production increased 1.3%. There were also gains in furniture and computer and electronic products output.

The jump in manufacturing output in August together with a 1.4% rebound in mining, lead to a 0.6% increase in industrial production last month. That was the largest gain in industrial output since August 2018 and followed a 0.1% dip July. Industrial production rose 0.4% on year-on-year basis in August.

Oil and gas well drilling fell 2.5% in August, declining for a second month. Energy firms have been cutting spending on new drilling to focus more on earnings growth instead of increased output. This has contributed to weakness in business investment, which contracted in the second quarter for the first time in three years.

Utilities output increased 0.6% last month.

Capacity utilisation for the manufacturing sector, a measure of how fully firms are using their resources, increased to 75.7% in August from 75.4% in July. Overall capacity use for the industrial sector rose to 77.9% from 77.5% in July. 

Reuters