With Small Decline in Manufacturing

• Industrial production rose 0.2% in May and has risen every month in 2022. Production is up 6% over the past year.
• There was a small decline in manufacturing output, with increases for mining and utilities. Higher energy prices are pushing up mining output.
• The capacity utilization rate rose slightly in May. Supply-chain disruptions, not capacity constraints, are causing high goods inflation.
• Industrial production will continue to expand in the second half of 2022, but at a slower pace than in the first half.

Industrial production rose 0.2% in May from April, the fifth straight monthly increase. Since December 2021, industrial output has risen a solid 4%.

Manufacturing output fell 0.1% over the month, with declines of 3% for wood products and 2% for machinery. This was the first decline in manufacturing output since January. There was a solid increase in production of autos and parts, up 0.7% for the month; this was the third straight monthly increase in the industry, suggesting supply-chain problems are abating. Mining output rose 1.3% for the month as high energy prices continue to drive production higher; mining output has risen for eight straight months. Utilities output rose 1.0% for the month on warmer-than-usual weather.

On a year-ago basis total industrial production was up a large 5.8% in May. This consisted of increases of 4.8% in manufacturing, 9.0% in mining, and 8.4% in utilities.

The overall capacity utilization rate rose 0.1 percentage point in May to 79.0%. The manufacturing rate fell slightly in May, to 79.1% from 79.2% in April.

The industrial sector continues to expand. Although manufacturing output fell over the month, that followed three consecutive monthly increases of around 1% each, and output is still up almost 5% over the past year. There was also another healthy increase in the auto industry. Mining output continues to increase, with a gain of almost 60% over the past year in oil and natural gas well drilling as producers increase production in response to higher prices. Still, gasoline prices are at record highs due to very strong demand and a drop in supply following the Russian invasion of Ukraine. Also, the increase in energy output has been smaller compared to previous energy price spikes, due to increased discipline in the industry.

Industrial production growth will slow through the rest of this year and in 2023 as the cumulative impact of Federal Reserve interest rate increases weigh on demand, particularly for interest-rate sensitive industries like building materials and durable consumer goods.

The capacity utilization rate of below 80% would normally indicate limited inflationary pressures in the US economy. But that rate does not capture ongoing supply chain difficulties and the impact of the war in Ukraine, and so inflation is well above the Federal Reserve’s 2% objective, using the personal consumption expenditures price index. The New York Fed’s Global Supply Chain Index indicates that supply chain problems are gradually easing but remain very high. A normalization in supply chains over the rest of 2022 should slow goods inflation. In particular, increasing auto output will push down prices for new vehicles in 2023.

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