Unexpected Drop in Manufacturing Output Points to More Inflation Ahead

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U.S. factory output slid last month as a shortage of computer chips disrupted auto production and capacity ultization continued to lag, pointing to further inflationary pressures ahead.

Manufacturing production dipped 0.1 percent in June — the third drop in five months, the Federal Reserve reported Thursday.

The decline was largely due to the auto sector. The chip shortage pushed the production of cars, trucks and auto parts down 6.6 percent in June. Excluding autos, industrial production rose 0.4 percent last month.

The contraction was deeper than expected. Economists, who are aware of the supply constraints facing the auto sector, forecast a 0.3 percent increase for manufacturing.

Capacity utilization in manufacturing, which measures how much of the productive capacity of U.S. factories is employed in production, fell one-tenth of a percentage point to 75.3. This measure is down three-tenths from a year ago. Compared with February 2020, just before the pandemic, this is down 1.2 percentage points.

This is well below levels that could cool off inflation in key areas of the economy. Capacity utilization in finished goods, which are thought to have the biggest impact on consumer prices, fell by one-tenth of a percentage point.

Overall, industrial production — including output at factories, mines and utilities — rose 0.4 percent last month after increasing 0.7 percent in May and just 0.1 percent in April. Industrial output is up 9.8 percent from a year earlier, when it was held down by social distancing rules and other measures aimed at stemming the pandemic.

“The manufacturing sector continues to be hobbled by supply constraints,″ said Stephen Stanley, chief economist at Amherst Pierpont Securities. “The highest profile example is the struggle by automakers to manage through a chip shortage.″

Utility output climbed 2.7 percent in June as Americans cranked up the air conditioning to battle a heat wave across much of the country. Mining output rose 1.4 percent on an uptick in oil and gas production.

Overall capacity utilization rose to 75.4 percent in June, the highest rate since the pandemic struck last year, bosted by sizeable gains in mining and utilities.

American industry has been bustling as the coronavirus threat recedes, despite a shortage of workers and trouble getting supplies in time. The Institute for Supply Management, an association of purchasing managers, reported that its manufacturing ticked slightly lower last month compared to May. But it still came in at 60.6 on a scale where anything above 50 signals growth. Still, factory hiring shrank, ISM found, largely because manufacturers are struggling to fill job openings as the economy rebounds with unexpected speed from the coronavirus recession.

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