Weaker-than-expected industrial production figures for the US had little impact on the dollar as the markets are more focused on Wednesday’s rate decision by the Fed and the escalating stand-off between Greece and its creditors. Nevertheless, as the Fed moves into a period of data dependency for the timing of its expected rate rise, it will be watching closely all indicators to assess the speed at which economic growth rebounds from the first quarter weakness.
Industrial production in May declined by 0.2% month-on-month, against estimates that it would rise by 0.2%. In a further sign of weakness, April’s figure was revised down to -0.5% from an earlier reading of -0.3%. The sector was dragged down by a drop in energy production as falling oil prices hit spending in the energy sector. Oil and gas well drilling slumped by 7.9%, contributing to a 0.3% fall in mining output. Manufacturing production, which makes up three quarters of industrial output, also fell by 0.2% as the strong dollar continued to hurt exports. Autos and parts was an exception and performed strongly with production up by 1.7% but overall weakness in non-durable goods led to a 0.3% drop in consumer goods production.
Capacity utilization for the industrial sector fell to 78.1% in May from 78.3% in April, indicating a slight increase in slack in the US economy during the month. This means that industrial output has some way to go before it reaches full capacity. The weakness in manufacturing was further highlighted by the Empire State Manufacturing index for June, which came in at -1.98 against expectations of 6.00, where a figure below 0 indicates contraction.
Today’s figures would not change the view that the Fed is on course to raise interest rates late this year, most probably in September, but they are likely to shift the focus away from industrial data to employment and consumer spending as industrial output is less of a threat to inflation than wages growth and retail prices.
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