U.S. manufacturing production unexpectedly dropped by 0.4% in April, but most economists expect stronger growth as 2014 progresses.

Manufacturing Output Takes a Tumble in April

May 15, 2014
Industrial production falls 0.6% in April. NY, Philadelphia manufacturing surveys report growth.

After gains in February and March, manufacturing production fell 0.4% in April, the Federal Reserve reported today. Factory output had been expected to pick up by 0.3% as the effects of winter storms receded. Year over year, however, factory production was 2.1% higher last month than in April 2013.

Capacity utilization in the nation’s factories also fell in April, by 0.5% to 76.4, a rate 2.3% below the long-term average of 78.7%.

Daniel J. Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), said manufacturing activity was “rebalancing itself” relative to the economy as a whole.

"In the first quarter, inflation-adjusted GDP was virtually unchanged while manufacturing production increased at a 2.1% annual rate. GDP statistics showed large declines in housing activity, business spending for equipment, and exports of goods in the first three months of 2014. While the weakness in the economy can be explained by the extreme weather, the full toll was not fully reflected in manufacturing industrial production activity until April."

But Alan Tonelson, a research fellow at the U.S. Business and Industry Council, said the April figures demonstrated more fundamental problems in the manufacturing economy:  

“A monthly real production drop in April and annual revisions issued in late March show that U.S. manufacturing’s recession continues, with real output now back below the pre-recession peak hit in December, 2007. These net losses expose the manufacturing renaissance claims propagated by President Obama and other cheerleaders as a damaging hoax which keeps masking the urgent need for policy overhaul on the international trade and other fronts.”

Industrial production as a whole declined 0.6% in April, but was 3.5% higher than in April 2013. Industrial production now stands at 102.7% of its 2007 average. Production in U.S. mines rose 1.4% in April, following a gain of 2.0% in March. Utilities production fell 5.3%, slightly less than in April 2013, as spring weather brought lower demand for heating.

Durable goods production dropped 0.3% in April, led by declines in primary metals, machinery and furniture and related products. Aerospace had the largest gain at 1.3%. Capacity utilization for durable goods manufacturing declined 0.5 percentage point to 76.1%, a rate 0.9% below its long-run average.

Nondurable manufacturing output moved down 0.4% in April after having gained 0.7% in March; the index was 1.7% above its level in April 2013. Decreases in April were widespread among the major components of nondurables, the bank reported, with losses of 1.0% or more recorded by petroleum and coal products and by plastics and rubber products. Capacity utilization for nondurable manufacturing moved down 0.4 percentage point to 78.2%, a rate 2.5 percentage points below its long-run average.

Economists such as Chad Moutray of the National Association of Manufacturers pointed out that the trend in manufacturing was still of moderate growth:

“While manufacturing activity in April was slightly disappointing, it is important to note that output continues to reflect modest gains year-over-year, particularly for durable goods firms (up 4.3%). Nondurable goods activity has declined 0.35%, however, over the past 12 months. The largest year-over-year gains were in the apparel and leather (up 7.5%), motor vehicles and parts (up 6.8%), nonmetallic mineral products (up 6.0%), machinery (up 5.0%), and wood products (up 4.9%).”

While the April drop in manufacturing activity was unexpected, other signs regarding the sector were more positive today as two of the regional Federal Reserve banks issued monthly manufacturing reports. Lindsey Piegza, chief economist for Sterne Agee, noted an uptick in manufacturing in the New York area in today’s manufacturing report from the New York Fed:

“Empire Manufacturing rose from 1.29 to 19.01, the highest reading since June 2010. Certainly a welcomed regional gain suggesting at least pockets of strength around the country when it comes to manufacturing. National activity has been positive but the trend has been very uneven.”

Heading south on I-95, the Philadelphia Fed today reported in its Business Outlook Survey that manufacturing activity had expanded in May for the third consecutive month:

“Firms reported continued increases in overall activity, new orders, shipments, and employment this month. Firms reported more widespread price pressures. The survey’s future activity indexes indicate that firms expect continued growth and employment increases over the next six months.”

MAPI’s Meckstroth also remains optimistic about growth in the U.S. economy and manufacturing in 2014:

"We believe that the economy will quickly shrug off the first quarter weakness because the fundamentals, such as employment growth, personal income growth, and corporate profitability, remain solid. Much stronger growth in the second quarter will allow a quick rebalancing in manufacturing production and lead to a timely return to growth. MAPI forecasts that manufacturing production will increase 3.2% in 2014 and 4.0% in 2015."

NAM’s Moutray sounded a more cautious, though still optimistic, note:

“[T]he U.S. economy has started 2014 at a much slower pace than anticipated, particularly given the strong momentum seen at the end of 2013. While manufacturers have begun to rebound from winter-related softness earlier in the year, it remains clear that output growth has not fully recovered to the pace seen just a few months ago. We remain hopeful for the demand and production to accelerate in the coming months, but April’s decline in activity shows just how fragile our recovery has been.”

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