US Industrial Sector Activity Improves

by | Jul 22, 2024 | Economic Perspectives

After two months of undershooting expectations, retail sales finally beat them in June. Admittedly, it was not such a high bar: consensus anticipated a 0.3% m/m drop in sales and they were flat instead. The May data was also revised modestly higher. Nevertheless, the details remain somewhat mixed. The two weakest categories were gasoline stations (-3.0% m/m) and motor vehicles and parts (-2.0% m/m), the former reflecting a sizable retreat in prices during the month. Among the best performing categories were non-store retailers (1.9% m/m), building materials (1.4%) and health and personal care (0.9%). Control sales (excluding food services, building materials, autos dealers and gas stations) jumped 0.9% m/m, an unusually larger outperformance relative to overall sales. But segments of discretionary spending like recreation and eating out were on the soft side.

The latest data updates support the idea that industrial sector activity is reviving. Until a couple of months ago, the story had largely been confined to a “bottoming out” process, but now there is a little outright growth to speak about. It remains to be seen how these green shoots develop from here, and we do not anticipate any sharp reacceleration. Industrial production rose 0.6% m/m in June, building on May’s 0.9% monthly advance to settle 1.6% higher than a year earlier. This marks the best y/y comparison since November 2022. All sectors advanced, with manufacturing up 0.4% m/m, utilities up 2.8% m/m, and mining up 0.3%. Of the three, utilities leads in terms of y/y growth with a 7.9% y/y advance, driven by a 10.3% y/y jump in electricity output. By contrast, mining is down 0.6% y/y and manufacturing is up a rather modest 1.1%y/y. Within manufacturing, the ongoing healing in the automotive supply chain have made this sector a relative outperformer. We anticipate further gains here to help lift industrial activity gently higher over the remainder of 2024.

Signals from the regional Fed manufacturing surveys released this week turned more favorable as well, with both the Empire and Philly Fed metrics improving more than expected. The beat on the Philly Fed index was particularly noteworthy as the headline jumped 12.6 points whereas consensus only anticipated a minimal increase (Figure 1, page 2).

That being said, there was such sharp improvement in some of the details that we are left scratching our heads a little and wondering about their sustainability. For instance, new orders surged 22.9 points—the second best improvement since June 2020. The best single-monthly gain since then had been recorded last August and was then followed by a 22.9-point drop the following month. Retooling at auto plants may have played a role here, or there may be some other idiosyncratic forces at play that we can’t quite yet discern, but we are struggling to find a clear source for such a powerful resurgence in demand. Even more striking was the 35-point surge in shipments. Not only was this the single best monthly gain since June 2020 (when factories were still emerging from lockdowns), but it left the metric at its highest level since May 2022. The magnitude and abruptness of this shift looks somewhat suspect to us. The employment metric exhibited similar behavior, though someone less acute. The employment subcomponent rose by 17.7 points (the most since July 2020) to the highest level since October 2022. Finally, the price metrics sent some contradictory signals. Prices paid declined, but prices received surged to the highest since January 2023. The sheer intensity in the component moves this month warrant some caution in interpreting the report, but we do not deny that the overall message is directionally positive for the manufacturing sector.

Last month, we said that “housing activity is relapsing amid elevated interest rates”. While that remains true, the latest data suggest that the extent of the pullback may not be quite as dramatic as it previously appeared. Still, this is a story of less weakness, not one of outright strength. Housing starts rose to a better than expected 1.353 million (seasonally adjusted annualized) in June, with May’s data revised higher as well. The same dynamic was at play with permits as well as building permits increased for the first time in four months. In both cases, the outperformance was driven by the volatile multi-family segment, however, as single family starts and permits both declined. This makes the improvement less trustworthy in our view, so the near term outlook remains softish. Case in point: even after the better June data, starts are down 4.4% y/y and permits are down 3.1%.

This is reflected in deteriorating homebuilder sentiment. The NAHB (National Association of Homebuilders) index ticked down one point to 42 in July. This marked the third consecutive decline but also the smallest, perhaps suggesting that most of the deterioration may have already occurred. The details were mixed and movements across components unsurprisingly small.

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