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Manufacturing Activity Increases for A Second Month but Full Recovery Still Far Off – Robert Hughes (07/16/2020)

Industrial production rose 5.4 percent in June following a rise of 1.4 percent in May. The back-to-back gains were not enough to overcome the back-to-back declines of 4.4 percent and 12.7 percent in March and April, respectively. For the second quarter, industrial production fell at a 42.6 percent annualized rate, the worst performance since World War II. Over the past year, industrial production is down 10.8 percent.

Manufacturing output, which accounts for about 75 percent of total industrial production, rose 7.2 percent, a monthly record, after gaining 3.8 in May (see top chart). The gains follow declines of 5.1 percent and 15.9 percent in March and April. The back-to-back gains in May and June still leave manufacturing output 11.2 percent below year-ago levels. With the manufacturing output index at 93.3 for June, output is about 11 percent below the 2018-2019 average index level (see bottom chart).

The gains in the manufacturing sector in June were widespread across all major market and industry groups. Measured by market segment, consumer-goods production was up 9.0 percent in June, with consumer durables rising 36.6 percent and consumer nondurables gaining 3.3 percent. Consumer durable-goods production was led by a 91.5 percent jump in automotive products. Business-equipment production increased 11.8 percent in June while construction supplies rose 1.3 percent for the month. Materials production (about 46 percent of industrial activity) increased 3.1 percent for the month. Despite the gains in June, nearly every major segment and industry shows a decline from a year ago.

Total industrial utilization rose to 68.6 percent in June from 65.1 percent in May. That is well below the long-term (1972-2019) average utilization of 79.8 percent. Manufacturing utilization rose 4.6 percentage points to 66.9, well below the long-term average of 78.2 but less below the 2018-2019 average of 76.1 (see bottom chart). Still, the data suggest output and utilization remain weak and it may take substantial time before manufacturing returns to pre-pandemic levels.

Mining output posted a 2.9 percent decline for the month, the fifth decline in a row, while utilities output rose 4.2 percent in June. Over the past year, mining output is down 16.9 percent while utilities output is up 0.6 percent.

Lockdown policies to combat the spread of COVID-19 pummeled economic activity in March and April while the easing of restrictions in May and June is aiding in the reversal of some of the economic carnage. However, it will likely be a slow path back to pre-pandemic levels of activity.