U.S. Industrial Production Falls Despite Low Oil Prices

Industrial production in the United States suddenly contracted despite more optimistic expectations of stable or growing production.

According to the Federal Reserve survey on industrial production and capacity utilization, total industrial production fell 0.1% in August and manufacturing fell 0.4%, reaching a seven-month low. While remaining 24.3% above the recession low, industrial production disappointed analysts who expected a U.S. recovery in manufacturing to drive the index higher.

Industrial production in the United States suddenly contracted despite more optimistic expectations of stable or growing production.

According to the Federal Reserve survey on industrial production and capacity utilization, total industrial production fell 0.1% in August and manufacturing fell 0.4%, reaching a seven-month low. While remaining 24.3% above the recession low, industrial production disappointed analysts who expected a U.S. recovery in manufacturing to drive the index higher.

Recently, economists have suggested that industrial production is unlikely to see significant gains while the labor force participation rate declines. According to a working paper by Robert J. Gordon of Northwestern University for the National Bureau of Economic Research, the decline in labor force participation will need to decelerate before real GDP growth, including industrial production, can rise year-over-year at forecasters’ expected 3-3.5% rate. 

“For output to grow at that rate without a decline in the unemployment rate … would require some combination of a much slower rate of decline in the labor-force participation rate or even a reversal toward an increasing LFPR, as well as a revival of labor productivity growth well above the 1.2 percent average growth rate of the past decade, not to mention the 0.6 percent average over the past four years,” Gordon wrote.

Gordon concludes that the current sluggish economic growth rate in the U.S. is likely to continue, with growth “almost 10 percent below the CBO’s current forecast” of over 3%.

Falling Demand Lowers Capacity Utilization

With lower demand from U.S. consumers, manufacturers and industrial firms are lowering their output to below full capacity. According to the Fed, capacity utilization, a measurement of actual industrial output relative to total possible output, fell to 78.8%, below the index’s average for the period spanning 1972 to 2013.

The Fed noted that, excluding vehicle and vehicle part production, factory output was higher, suggesting that sluggish demand for vehicles may be dragging the overall index. Mining also outperformed other industrial activities, with a 0.5% increase in production.

Lower Oil Prices, Higher Utility Output

Prior to the Fed’s report, economists were becoming more optimistic as lower oil prices and lower gas prices seemed to create a virtuous cycle that encouraged more Americans to spend more despite rising levels of debt and stagnant wages. Brent crude oil prices fell to $97 per barrel on Monday trading, a two-year low. Prices for oil have been falling since peaking earlier in the year, with growing expectations for deflation in the European Union and declining growth rates in China signaling lower overall demand for fossil fuels. The result of that trend has been cheaper oil and energy costs, which can often encourage greater industrial production.

The Fed saw lower energy costs encouraging utility output, which rose 1% month-to-month in August, but failed to bring expansion to overall industrial output. Despite the modest gain, utility output has declined 1% on a year-over-year basis. Total industry output fell 1.2% on a year-over-year basis.

Industrial capacity utilization hit a low of 66.0% in 2009, rising to August’s 78.8% rate. However, that is still 7.2% lower than the rate seen in 1988-1989 and in 1994-1995.