Industrial Output Growth Slows In June

Industrial production increased 0.2% in June, the Federal Reserve reports. The rise is moderately below expectations, although the good news is that industrial output is still expanding at a decent pace on a year-over-year basis, which suggests that the outlook for the business cycle is still encouraging. The bad news is that we have another data point that hints at the possibility that the economy isn’t about to accelerate much beyond the modest pace we’ve seen lately.

The stronger numbers in payrolls in recent months paint a slightly brighter profile for looking ahead. But today’s update on industrial production (and yesterday’s softer-than-expected rise in retail sales) have yet to align with the improvement in the labor market. We’ll have another clue with tomorrow’s release on housing starts for June. Meantime, the data overall points to a second-quarter rebound that’s weaker than it appeared a month ago and so it’s fair to say that the jury’s still out for projecting a material change for the better in the broad trend.

As for this morning’s report on industrial activity, the year-over-year growth rate continues to track in the low-4% range. June output was 4.3% above the year-earlier level, unchanged from the annual pace through May. The manufacturing component weakened a bit, however, with output for this cyclically sensitive sector advancing 3.5% through June vs. a year ago. That’s down from May’s 3.7% annual rate.

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Overall, the economy continues to expand at a modest pace, and there’s no reason to think that the upbeat review of the macro trend through May will deteriorate in a substantial degree when we update the numbers through June. Today’s news on industrial activity, although a bit disappointing, doesn’t change the big-picture analysis that anticipates that the expansion will roll on. But the supporting evidence for predicting an acceleration in economic growth generally looks a bit weaker at the moment. Upcoming releases may tell us otherwise, but for now a modest expansion remains the base-case scenario.

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