There are a lot of factors weighing in on September’s industrial production data. A struggling manufacturing sector, the Boeing workers strike, and the recent hurricanes will all play a role. Industrial production in the United States fell 0.3% in September, a larger drop than the estimated 0.2%. Capacity utilization, a measure of how much firms are utilizing their full productive potential, fell to 77.5% in September, down from 77.8% in August, economists had estimated that it would stay flat.This is a three year low for capacity utilization. Manufacturing itself was down 0.4% last month, showing that the manufacturing sector, which makes up 10.3% of the economy and three-fourths of all industrial production, is still struggling and the economy is going to have to continue to rely on the services sector in the short-term. This is the third month of declining manufacturing output in the last four months. For the third quarter of 2024, industrial production was down to an annual rate of 0.64%, this is a remarkable cooldown for production after a 2.5% increase in the second quarter of this year.
According to the Fed’s estimates, the Boeing strike and the hurricane were responsible for a 0.6% decrease in production across the nation last month. The strike and the hurricane were each responsible for 0.3% of that 0.6%. Bradley Saunders of Capital Economics added, “With the Boeing strike ongoing and Hurricane Milton following firmly on Hurricane Helene’s tail, production is unlikely to recover strongly in October,” 33,000 Boeing employees were on strike earlier in the month but their union has now made some sort of agreement to resume work for higher pay down the line. The reason these events were able to have such a meaningful impact in production is because the manufacturing sector is currently struggling. In a healthier and more robust manufacturing environment, these events would not be able to sway the data as much as they did in September. In an article from FXStreet it reads, “In a better manufacturing environment, these one-off factors would merely be headwinds holding back the pace of output growth; in today's stall-speed climate, they are enough to make output contract.”
High borrowing and financing costs are also playing a large role in the decrease of production spending. Stuart Paul of Bloomberg wrote, "Hurricane Helene presented a downside risk to September's industrial-production data, but the actual downside surprise was due more to restrictive monetary policy than weather. Paired with downward revisions to the August data, we can see monetary policy still weighing on the more interest-sensitive sectors in the economy." The Fed began easing monetary conditions in mid-September with a 50 basis point rate cut, it will take time and further rate cuts to start healing the manufacturing and production sectors.
September’s data isn’t particularly surprising, but it shows that we need certain areas of the economy, specifically manufacturing, to improve in the coming months. Although it may take a few months to see the fruits of a less-restrictive monetary policy, the improved financial conditions should bolster manufacturing output. Sam Bullard, senior economist at Wells Fargo wrote, “Easier monetary conditions should eventually breathe some life into manufacturing in coming quarters, however. There is also likely a growing need for capital as businesses simply need to replace worn-down equipment now that we are more than three years beyond the post-pandemic boom,” Businesses and manufacturers are currently in a place of hesitation, waiting for financial conditions to ease further and for an election to wrap up before they will be willing to meaningfully invest in capital expenditures. Data such as monthly industrial production numbers will be important to look at to see if the Fed’s hopes of improving the economy by decreasing rate cuts can hold any water.
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