Production Gains on Utility Output, Yellen Green Lights 2015 Rate Hike
- Industrial Production for June increased by 0.3 percent as utility and mining output climbed.
- The Producer Price Index for Final Demand increased by 0.4 percent in June.
- FOMC Chairwoman Janet Yellen testified that she expects to raise the fed funds rate this year.
- The Empire State Manufacturing Survey climbed to 3.9 for July.
Industrial production for June increased by 0.3 percent after declining in April and March. Overall production has been stagnant this year, increasing only in March and June. Part of the overall stagnant pattern is due to weather, swinging utility output beyond normal seasonal adjustments. The other part comes from manufacturing output, which accounts for nearly three-quarters of total output. Manufacturing output has also increased in only two out of the first six months of this year, in March and again in April. Three factors are contributing to the unimpressive manufacturing results. (1) Auto sales are near the cyclical peak, so a significant increase in auto assemblies from this point is unlikely. (2) A strong dollar is increasing price competition for U.S. manufacturers. (3) Reduced oil field activity is decreasing demand for machinery, fabricated metals and other products. In June manufacturing output was flat, as it was in May. June manufacturing output was weighed down by declining motor vehicle production.
Producer prices increased more than expected in June. The PPI for final demand gained 0.4 percent, boosted by a 2.4 percent increase in the energy sub-index, primarily gasoline. Food prices also increased as bird flu decimated poultry farms this spring, driving up the price of eggs. On a year-over-year basis, the PPI for final demand is still negative, down 0.7 percent, reflecting the drop in oil prices over the last year. The recent drop in oil prices, from near $60 per barrel for WTI, to now $52 per barrel suggests that the return to positive year-over-year producer price inflation may be delayed, depending on how low oil eventually goes, and for how long. The International Energy Agency stated in July that the global oil market is “massively oversupplied”; suggesting that oil prices could take another leg down, below the current $52 price regime for WTI.
Federal Open Market Committee Chairwoman Janet Yellen testified before the House Committee on Financial Services this morning. In her written testimony, Yellen confirmed her view that “if the economy evolves as we expect … (it) would make it appropriate at some point this year to raise the federal funds rate target.”
The Empire State Manufacturing Survey for July increased to 3.9, suggesting that manufacturing conditions in New York and Northern New Jersey have recently improved slightly.
Market Reaction: Equity markets are up. The yield on 10-Year Treasury bonds is down to 2.39 percent. NYMEX crude oil is down to $52.28/barrel. Natural gas futures are up to $2.88/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Industrial Production 07-15-15.