US industrial output up 1.0% in July, above expectations; down 0.2% over past 12 months; NAB: output ex-motor vehicles/parts up 0.1%; long-term Treasury yields rise; rate-cut expectations soften; capacity utilisation rate up 0.7ppts to 79.3%, still below long-term average.
The Federal Reserve’s industrial production (IP) index measures real output from manufacturing, mining, electricity and gas company facilities located in the United States. These sectors are thought to be sensitive to consumer demand and so some leading indicators of GDP use industrial production figures as a component. US production collapsed through March and April of 2020 before recovering the ground lost over the fifteen months to July 2021.
According to the Federal Reserve, US industrial production increased by 1.0% on a seasonally adjusted basis in July. The result was greater than the 0.4% expansion which had been generally expected and in contrast with June’s 0.8% contraction after revisions. On an annual basis the contraction rate slowed from June’s revised figure of 0.8% to 0.2%.
“Auto production was a support to the stronger monthly outcome. Ex-autos, output increased a smaller 0.1% following two consecutive months of declines,” said NAB economist Taylor Nugent.
Long-term US Treasury bond yields increased on the day. By the close of business, the 2-year Treasury yield had returned to its starting point at 4.96%, the 10-year yield had added 3bps to 4.25% while the 30-year yield finished 4bps higher at 4.36%.
In terms of US Fed policy, expectations of a lower federal funds rate in the first half of 2024 softened. At the close of business, contracts implied the effective federal funds rate would average 5.34% in September, slightly above the current spot rate, and then average 5.36% in October. December futures contracts implied a 5.425% average effective federal funds rate while August 2024 contracts implied 4.805%, 53bps less than the current rate.
The same report includes US capacity utilisation figures which are generally accepted as an indicator of future investment expenditure and/or inflationary pressures. Capacity usage had hit a high for the last business cycle in early 2019 before it began a downtrend which ended with April 2020’s multi-decade low of 64.2%. July’s reading increased from June’s revised figure of 78.6% to 79.3%, still below the long-term average of 80.1%.
While the US utilisation rate’s correlation with the US jobless rate is solid, it is not as high as the comparable correlation in Australia.
