The U.S. manufacturing sector has hit an economic air pocket.
Manufacturing output fell 0.5 percent in April compared with a month earlier, data from the Federal Reserve showed Wednesday. This is the latest evidence that slumping growth around the globe has begun to drag down U.S. economic growth.
Manufacturing production fell by about 0.4 percent on average during the first three months of the year. This suggests that the factory slowdown is still gaining steam rather than reversing course.
Factory production of durable goods fell almost 1 percent. While auto production was expected to be weak due to weakening demand from consumers, the broader weakness was deeper than anticipated. Machinery, electrical equipment, appliances all declined by more than 2 percent, according to the Fed.
Nondurable manufacturing faired better, edging down only slightly from the previous month. The largest gains were in apparel, paper, and paper products, which may reflect a boost from manufacturers moving production into the U.S. to avoid China tariffs. Weighing against that interpretation, however, are declines in textile mills and plastic and rubber products.
Industrial production, a broader category that includes manufacturing, mining, and utilities, also declined 0.5 percent in April. Manufacturing production is the largest component of industrial production.
Mining production rose 1.6% in April, directly reflecting higher energy prices.
On the positive side, the overall industrial production figure for March was revised upward from an initially reported decline of 0.1 percent to a gain of 0.2 percent. That indicates that the first-quarter 3.2 percent economic growth was likely as strong as it seemed and perhaps stronger.
But the sharp decline in April’s growth will be a slight drag on second-quarter growth. Coming on the heels of a worse-than-expected retail sales report Wednesday, it appears to confirm indications that the economy got off to a slow start in the second quarter and bolsters forecasts that the economy will slow substantially in the April through June period.
Manufacturing is just a small part of the U.S. economy. But it has become a focus in these reports because of President Donald Trump’s efforts to reinvigorate the sector. And because it is so exposed to changes in global economic conditions, it is looked to as an indicator of how slumping global demand could weigh on U.S. economic conditions.
Unfortunately, the Fed’s figures to not breakdown the production figures in a way that it is possible to see how much of the slowdown is due to changing domestic demand and how much is due to faltering international demand.
The data for April is from before the recent U.S. hike in tariffs on Chinese goods. In April, trade talks were widely reported to be making progress and expected to result in a deal in late spring or early summer. Many believed both U.S. and Chinese tariffs would decline. So the slump sets a baseline for economic conditions before the recent round of hikes and doesn’t reflect heightened trade tensions.
Despite sliding production, manufacturing added 4,000 jobs in April. That was a pickup from March negative six-thousand and February’s paltry 1,000. On average, manufacturing added 22,000 a month in 2018. Some have said tight labor market conditions could be holding back job creation as manufacturers struggle to find workers.
The tight labor market might also be weighing on another measure of factory health, capacity utilization. For manufacturers, this fell 5 tenths of a percentage point in Apri to 75.7 percent. For the industrial sector overall, capacity utilization fell 6 tenths to 77.9. Economists had called for a two-tenths improvement to 78.7.
A silver-lining in the lower-than-expected capacity utilization numbers is that this implies there is room for U.S. production to increase without increasing costs. That could ameliorate pricing pressure that could arise from higher tariffs on imports from China.