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Weekly Economic Commentary


Factory Production Slips in May, FOMC Meeting Likely to Conclude Without Fed Action

June 15, 2012

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Industrial production fell 0.1% in May after a 1.0% increase in April. The 0.8% increase in utilities production and 0.9% gain in mining output offset a large part of the 0.4% drop in manufacturing output (mining and utilities are not part of manufacturing but are a part of total industrial production).

Chart 1

Chart 1 a

Auto production fell 1.5% in May following a string of five monthly gains. Wood products (+1.0%) and electrical equipment (+0.3%) components posted gains in May, while primary metals (-1.6%), machinery (-0.5%), and furniture (-1.7%) were the categories that show the relatively large declines. Excluding autos, manufacturing output fell 0.3% in May, after a 0.5% increase in the prior month.
As a result of the reduction in production, the operating rate of the nation’s industries slipped to 79% during May from 79.2% in April, while the factory sector’s utilization rate declined to 77.6% from 78%.

Chart 2

 Chart 2
Industrial Production – May 2012 *- percent change from prior month

Chart 3

The mix of latest economic data – small gains in payrolls, reduction in factory production, elevated unemployment rate, and a dip in retail sales offset by positive indications from housing, advancing new orders in the ISM factory survey, and contained inflation – make the Fed’s decision at the June 19-20 FOMC meeting challenging. Bernanke’s testimony of last week offered reassurance that the Fed would provide support if financial conditions deteriorate due to the eurozone crisis but there were no tips to suggest the Fed would act on June 20. The outcome of the Greek elections on June 17 will not set a decisive course of action with regard to a solution for the Greek economy, but is most likely to result in negotiations as the Fed deliberates on June 19 and 20.
Decisions at the June 19-20 meeting will be colored by developments in Euroland, but the heart of the discussion is the U.S. economy. The Fed without doubt will step forward if the U.S. economy stands to be harmed by developments in the eurozone. In fact, the Fed could be involved in coordinated actions with other central bankers even prior to the FOMC meeting, if necessary. There is a great deal of uncertainty about the outcome of the Greek elections and course of action the authorities in Europe are likely to take. Assuming the Greek economic and political drama does not require central bankers involved in a global financial rescue effort, the Fed will be focusing on the U.S per se at the June meeting. If this forecast is accurate, the Fed is most likely to adopt suitable rhetoric to indicate if additional monetary policy action will be required in the near term. Although economic data are not uniformly strong and contain soft pockets, the U.S. economy does not appear to be in need of immediate emergency care at the present time.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.