U.S. industrial output rises slightly as hurricanes impact lingers

WASHINGTON – 17 October 2017: U.S. industrial production rebounded modestly in September as the lingering effects of Hurricanes Harvey and Irma hobbled activity at factories, but the outlook for the industrial sector remains bullish amid a strengthening global economy and weakening dollar.

The soft industrial production data was offset by another report on Tuesday showing import prices posting their biggest gain in 15 months in September, and steadily rising underlying imported inflation.

The Federal Reserve said industrial production increased 0.3 percent last month after a 0.7 percent drop in August that was smaller than initially reported. The U.S. central bank said the "continued effects of Hurricane Harvey and, to a lesser degree, the effects of Hurricane Irma combined to hold down the growth in total production in September by a quarter percentage point."

"We will likely see solid growth in the industrial production data in the fourth quarter as production bounces back following the storm-related disruptions," said Daniel Silver, an economist at JPMorgan in New York.

Last month's rise was in line with economists' expectations. Industrial production was previously reported to have declined 0.9 percent in August. The Fed also revised data for July to show industrial output slipping 0.1 percent instead of the previously reported 0.4 percent increase.

Industrial output fell at an annual rate of 1.5 percent in the third quarter. Excluding the effects of the hurricanes, industrial production would have increased at an annual rate of at least 0.5 percent, the Fed said.

Manufacturing output edged up 0.1 percent in September after dropping 0.2 percent August. Manufacturing production was restrained by a 2.6 percent plunge in the production of non-durable chemical products, which was likely related to Harvey.

Motor vehicle and parts production nudged up 0.1 percent last month. Manufacturing output declined at a 2.2 percent rate in the third quarter.

Despite the hurricane-related setback, manufacturing, which accounts for about 12 percent of the U.S. economy, remains on solid ground amid a weakening dollar, firming global economy and inventory accumulation by businesses.

Factory sentiment is also at multi-year highs. In September, mining production rose 0.4 percent, reflecting gains in oil and gas extraction. Utilities production rose 1.5 percent last month. With output tepid last month, industrial capacity use rose 0.2 percentage point to 76.0 percent, and is 3.9 percentage points below its long-run average.

EXCESS SLACK

Officials at the Fed tend to look at capacity use as a signal of how much "slack" remains in the economy and how much room there is for growth to accelerate before it becomes inflationary.

"This excess slack could be an impediment to the Fed's elusive 2.0 percent inflation target," said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

The dollar rose against a basket of currencies as investors focused on the Labor Department report showing a 0.7 percent jump in import prices in September. Prices for U.S. Treasuries fell marginally, while stocks on Wall Street were little changed.

Last month's increase in import prices was the biggest since June 2016 and followed a 0.6 percent rise in August. In the 12 months through September, import prices climbed 2.7 percent after advancing 2.1 percent in August.

Last month, prices for imported petroleum increased 4.5 percent after rising 5.0 percent in August. Food prices surged 1.8 percent, the largest gain since July 2016, after edging up 0.2 percent in August.

Import prices excluding petroleum rose 0.3 percent after a similar gain in August, likely as some of the effects of the dollar's more than 6 percent depreciation against the currencies of the United States' main trading partners this year start to filter through.

Import prices excluding petroleum increased 1.2 percent in the 12 months through September.

"There is a hint in this report that the weakening in the dollar over the last year is beginning to feed into underlying prices," said John Ryding, chief economist at RDQ Economics in New York. "The decline in the dollar picked up pace from May to September and we think this will show through into core import prices."

The cost of imported goods from China was unchanged in September after slipping 0.1 percent in August. Prices for imports from China fell 0.7 percent on a year-on-year basis, the smallest year-on-year decline since April 2015.