US Industrial Production up 0.4% in August

* US industrial production rose 0.4% in August, in line with market expectations and following an unchanged reading in July and a revised 0.1% (previously reported as 0.2%) gain in June.
* Strength was concentrated in a 0.7% jump in the typically more stable manufacturing component, the strongest monthly gain since December 2012. Partial offset was provided by a 1.5% drop in utilities output, the fifth consecutive monthly decline in the measure. Mining output inched up 0.3% following a 2.4% jump in July.
* The capacity utilization rate rose to 77.8% from 77.6% in July.

US industrial production (IP) rose 0.4% in August, in line with market expectations, following an unchanged reading in July and a revised 0.1% (was 0.2%) gain in June. Encouragingly, the gain was largely concentrated in the relatively stable manufacturing component, which rebounded 0.7% following a downwardly revised 0.4% drop (was -0.1%) in July. Part of the rebound in manufacturing production resulted from a 5.2% rise in motor vehicle production following a 4.5% decline in July. The rebound in August lends support to the view that at least part of the weakness in the sector in the earlier month reflected difficulties seasonally adjusting the data around the traditional July auto retooling period rather than deterioration in the underlying trend. Providing partial offset to strength in manufacturing was a 1.5% dip in utilities output that marked a fifth consecutive monthly decline in the industry. Mining output inched up 0.3% following a larger 2.4% jump in July.

With the increase in output, the August capacity utilization rate rose to 77.8% from an unrevised 77.6% reading in July.

The increase in August leaves the average level of industrial production in the first two months of Q3 already 1.2% (at an annualized rate) above its Q2 level. This points to a likely strengthening in growth in the measure in Q3 following a modest 0.7% gain in Q2. While the pickup in industrial output is encouraging, other early indicators suggest that overall GDP growth in Q3 will not outperform a stronger-than-expected 2.5% gain in Q2. The Q2 increase was up from a 1.1% gain in Q1 and was surprisingly solid given sizeable fiscal contraction implemented in the first half of 2013 in the form of higher taxes implemented in January and government sequestration cuts in March. However, we continue to expect that, notwithstanding quarterly volatility, underlying economic activity will improve over the second half of this year as the pace of fiscal restraint eases. Our forecast assumes that overall GDP growth will slow to a still-respectable 2.2% in Q3 followed by a stronger 2.6% gain in Q4. This would still leave growth in the second half of 2013 averaging a stronger 2.4% than the average 1.8% gain in the first half of the year.

 

RBC

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