Production at U.S. factories rose more than anticipated in May, recovering from declines in the previous two months. However, the momentum may not continue due to higher interest rates and weakening demand for goods.
The Federal Reserve reported on Tuesday that manufacturing output increased by 0.9% in May, following a downwardly revised 0.4% decrease in April. Economists surveyed by Reuters had predicted a 0.3% rebound after a previously reported 0.3% fall in April. Manufacturing production had decreased in both March and April but showed a 0.1% year-on-year increase in May.
Manufacturing, which represents 10.4% of the economy, has been affected by higher borrowing costs. An Institute for Supply Management (ISM) survey published earlier this month noted that demand remains elusive, as companies are hesitant to invest due to current monetary policy and other conditions. The ISM highlighted that these investments include supplier order commitments, inventory building, and capital expenditures.
Spending on goods decreased in the first quarter for the first time in a year and a half. The Federal Reserve recently maintained its benchmark overnight interest rate in the 5.25%-5.50% range, where it has been since last July. U.S. central bank officials have postponed the start of rate cuts to potentially as late as December, with policymakers projecting only a single quarter-percentage-point reduction for this year.
Motor vehicle and parts output rebounded by 0.6% in May after a 1.9% drop in April. Durable goods manufacturing production increased by 0.6%, with significant rises in the output of wood products, machinery, computer and electronic products, as well as furniture and related products.
Nondurable manufacturing production rose by 1.1%, with a 1.5% fall in printing and support being offset by solid gains elsewhere.
Mining output climbed 0.3% after two months of decline. Utilities production advanced by 1.6% following a 4.1% rebound in the previous month. Overall industrial production accelerated by 0.9% in May, following an unchanged reading in April. Industrial production rose by 0.4% year-on-year in May.
Capacity utilization for the industrial sector, which measures how fully firms are using their resources, increased to 78.7% from 78.2% in April. This rate is 0.9 percentage points below its 1972-2023 average. The operating rate for the manufacturing sector increased to 77.1% from 76.6% in the previous month, 1.1 percentage points below its long-run average.
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