US manufacturers battle back

A much better-than-hoped industrial production release goes some way to offset the disappointment of the retail sales report. Total industrial output rose 0.9% month-on-month in July versus market expectations of a 0.4% gain, although there was a slight downward revision to June’s growth (to 0.2% from the initial 0.4% published figure).

The really encouraging story is that manufacturing surged 1.4% after a 0.3% contraction in June and means that all of the pandemic shutdown losses in output have been fully recovered. In fact, manufacturing output is 0.6 percentage points above the December 2019 level.

There were broad-based gains with auto output surging by 11.2% MoM after a period of sustained, chip-shortage-related weakness. Electrical equipment output rose 2.3% and aerospace up 1.9% were the other standouts. The only falls were experienced by apparel (-0.2%) and fabricated metals (-0.4%).

Supply chains issues, labour shortages and the legacy of higher commodity prices and shipping costs will continue to act as a drag on overall manufacturing, so to post such a decent rebound is encouraging news. Moreover, while costs have certainly gone up, there is growing evidence that manufacturers are able to pass them onto customers given strong order books and the knowledge that their customers have record low inventory levels. While good news for profitability, it is a key factor that could keep inflation higher for longer.

Outside of manufacturing utilities output fell 2.1% on more seasonal weather after June's heatwave-related surge while mining output rose 1.2% with oil and gas well drilling up 6.1%.