Industrial Production Increase Misleading

The 0.1% rise in US industrial output in June seems to defy expectations for the first decline since mid-2009, but the headline is deceiving. Manufacturing, the key component actually fell 0.4%. The headline was flattered by a 2.7% jump in utility output. Utility output also jumped 5.4% in May. Manufacturing output was hurt by the cuts in auto output. The 1.9% decline appears to be a correction to the 5.6% jump in May. Excluding auto and parts, manufacturing output was still off 0.3%.

The real weight on manufacturing was from consumer goods production. It fell 0.6%, led by a 1.7% decline in the output of appliances, furniture and carpeting. The output of business equipment rose 0.9% following a 1.4% rise in May. Computers and semiconductors output was the strongest.

Looking forward, utility output might remain firm in July and the high unemployment and weakness consumption does not auger well for improved consumer goods output. In turn, this implies risk to business investment too. Industrial output this month may be weak as well.

The buying of the euro seems to be slowing as the $1.29 area was approached, but momentum players are still thought to be good buyers on small pullbacks and good interest was reported in short-dated euro calls. While sterling, yen and Swiss franc are struggling to keep up with the euro, the dollar-bloc continues to under perform.