WASHINGTON: US industrial production fell sharply in July, the Federal Reserve said Thursday, pointing to a larger-than-expected impact from Hurricane Beryl. The news is likely to add to calls for the Fed to cut its key lending rate from a two-decade high next month, as its long-running campaign against inflation continues to percolate through to the broader economy.
Total industrial output contracted by 0.6 percent in July from a month earlier, when it rose by a revised figure of 0.3 percent, the US central bank said in a statement. This was sharply below market expectations of a 0.1 percent increase, according to Briefing.com. The Fed said industrial production had been held down by the early "July shutdowns concentrated in the petrochemical and related industries due to Hurricane Beryl,” which came ashore in Texas.
Meanwhile, the number of Americans filing new applications for unemployment benefits dropped to a one month-low last week, suggesting an orderly labor market slowdown remained in place, and dashing financial market hopes that the Federal Reserve could cut interest rates by 50 basis points next month.
The manufacturing sector experienced a 0.3 percent decline due to a plunge of almost eight percent in the index for motor vehicles and parts. Excluding this component, the manufacturing index actually increased by 0.3 percent, the Fed said. Meanwhile, the mining index was unchanged, and the utilities index slumped by 3.7 percent. "Normally, manufacturing snaps back after a disaster related temporary shutdown,” economists at High Frequency Economics (HFE) wrote in a note to clients on Thursday. "So the results are not as bad as they look.”
The economy’s resilience was reinforced by other data on Thursday showing retail sales increased by the most in nearly 1-1/2 years in July. Investors have been on edge after a jump in the unemployment rate to a near three-year high of 4.3 percent in July sparked fears that the economy was either in recession or nearing a downturn, concerns not shared by most economists. "Fed officials need not worry themselves to death about the outlook because the downside risks to the economy are fading fast with fewer job layoffs and robust consumer spending,” said Christopher Rupkey, chief economist at FWDBONDS. "The economy is not going off the rails.”
Initial claims for state unemployment benefits dropped 7,000 to a seasonally adjusted 227,000 for the week ended Aug. 10, the Labor Department said. Economists polled by Reuters had forecast 235,000 claims for the latest week. The second straight weekly decline erased the increase in late July, which had boosted claims to an 11-month high. Claims had risen last month, blamed on temporary motor vehicle plant shutdowns and disruptions caused by Hurricane Beryl in Texas. Layoffs remain low by historic standards.
The labor market is slowing as businesses scale back on hiring, failing to keep up with an immigration-induced surge in labor supply. The US central bank’s 525 basis points worth of rate hikes in 2022 and 2023 are curbing demand.
Financial markets lowered the odds of a half-percentage-point rate reduction at the Fed’s Sept. 17-18 policy meeting to 27.5 percent from 41.5 percent before the data, according to CME Group’s FedWatch tool. They saw a 72.5 percent chance of a 25-basis-point rate cut, up from 58.5 percent earlier.
The Fed has maintained its benchmark overnight interest rate in the current 5.25 percent-5.50 percent range for a year. The dollar rose against a basket of currencies on the data, while Treasury prices fell.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, fell 7,000 to a seasonally adjusted 1.864 million during the week ending Aug. 3, the claims report showed. The so-called continued claims are near levels last seen in late 2021, indicating that more people are experiencing longer bouts of unemployment.
A separate report from the Commerce Department’s Census Bureau showed retail sales jumped 1.0 percent in July, the largest increase since January 2023, after a downwardly revised 0.2 percent drop in June. Economists had forecast retail sales, which are mostly goods and are not adjusted for inflation, advancing 0.3 percent after previously being reported as unchanged in June. Retail sales increased 2.7 percent year-on-year in July. Consumers are maintaining spending by bargain hunting and trading down to lower-priced substitutes. Receipts at motor vehicle and parts dealers rebounded 3.6 percent, reversing a 3.4 percent drop in June that was blamed on a cyberattack.
Online store sales gained 0.2 percent after jumping 2.2 percent in June. Sales at gasoline stations edged up 0.1 percent. Building material and garden equipment store sales increased 0.9 percent.
Sales at food services and drinking places, the only services component in the report, rose 0.3 percent after edging up 0.1 percent in June. Economists view dining out as a key indicator of household finances. Furniture store sales advanced 0.5 percent. Receipts at electronics and appliance outlets vaulted 1.6 percent. But consumers spent less at clothing retailers as well as sporting goods, hobby, musical instrument and book stores. — Agencies