Manufacturing has been among the few bright spots in the recovery and today’s report on output does little to sway that view.
Industrial production increased a robust 1.2% in May. Eliminating outsized gain in utility production caused by a warm month, as well as any other contributions from energy, manufacturing output still grew a strong 1.0%.
Inventories among most businesses are near record lows based on current sales, which is encouraging firms to increase orders and re-stock bare shelves. If sales continue to grow modestly as many forecast, it seems reasonable to expect that manufacturing will continue to lead the recovery in the near term.
In the meantime, capacity utilization rose from 73.7% to 74.7%, indicating that some of the excess slack in manufacturing is being used up by rising production. Shuttering of plants over the past year has also had a limited impact in lifting capacity utilization.
With manufacturing output ramping up at a quick pace, hiring has picked up noticeably in the sector, providing a limited amount of good news on the job front.
Also noteworthy, capacity utilization, which stood just over 80% at the start of the recession before bottoming out at about 68% a year ago, has shown significant improvement – 74.7% as mentioned above.
Yes, there still slack at the nation’s factories, but expanded production and a lack of increase in capacity has been eating away at excess capacity.
If current trends continue, the fast-paced recovery among goods producers could put the Fed in a tight spot. Low rates needed to encourage growth in the rest of the economy and placate queasy financial markets could eventually stoke inflationary pressures among manufacturers.
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