Industrial production fell a disappointing 0.4% in May, after rising a downwardly revised 0.6% in April. Losses were widespread but vehicle production dominated the fall, dropping more than 4% for the month. Vehicle production took a breather after surging earlier in the year. That is despite rising vehicle sales and underscores our concern that the automakers are reaching to keep sales afloat with easy credit, leases and fleet sales. Historically, those tactics have borrowed from future sales. Production also lost ground in the volatile utilities sector, though that is less significant as it is tied more to the weather than to shifts in underlying consumer demand.
The only bright spot was mining, which showed an increase. Gains were in coal mining. The much anticipated pickup in the oil industry is still more of a wish than a reality. Producers are reporting that increased regulations for existing as well as new fields has raised the break-even price for U.S. oil producers. That is in addition to the backlog of bankruptcies from smaller producers that still need to be cleared in the wake of the oil price bust last year.
Separately, the producer price index (PPI) rose a more-than-expected 0.4% in May. The bulk of that increase was due to higher energy prices. There were some signs, however, of a pickup in service sector pricing. That would please Federal Reserve officials who are looking for signs of heat in what has been a fairly tepid economy.
Bottom Line. Today’s reports on industrial production and producer prices tell a tale of two economies. The manufacturing sector is struggling with intense foreign competition and weak growth abroad, while the consumer continues to move forward.
The Federal Open Market Committee (FOMC) will decide to remain firmly on the sidelines at the meeting today. We still have a lot of data to be released before members meet again in late July; look for Chair Janet Yellen to keep the Fed’s options open ahead of that meeting.