Mixed signs from the economy as sales climb, industrial output declines

Industrial output declines as manufacturing continues to struggle

In the industrial sector, total production fell 0.2 percent in July from June’s levels, falling well short of consensus estimates of a 0.2 percent gain. Year-over year growth slipped to 0.5 percent as a result, down from 1.1 percent in the previous month and the slowest pace of yearly growth since early 2017.

Industrial output in July fell despite a 3.1 percent rebound in utility production, essentially reversing the decline in utilities in the previous month. Manufacturing industrial production, which excludes mining and utility production from the total, fell by 0.4 percent. This marks the fifth monthly decline in manufacturing output of the year and drove yearly growth into negative territory at -0.5 percent.

While the retail sector enjoyed rising sales among the vast majority of industries in July, the industrial sector was plagued by widespread weakness during the month. Nearly two-thirds of the major industries in the sector reporting declining output, including big drops in non-durable manufacturing and mining output. 

The manufacturing sector continues to be plagued by slowing global growth, weak business investment, a generally strong dollar, and concerns over tariffs and trade policy. That has been enough to take all of the momentum out of manufacturing activity thus far in 2019

Behind the numbers

On the retail side, July’s results continue to point to strength in consumer demand. After a brief pause at the start of 2019, retail spending has been one of the lone standouts for the economy as it shifts into a lower gear. The yearly growth figures are still a far cry from the 6.5+ percent pace seen in the middle of last year, but that is mostly being driven by tougher comparisons this year. The monthly gains over the past few months have been quite impressive.

There are some caveats to go along with this, however. As we mentioned last month, a good deal of the growth in retail is coming from e-commerce sales. The nonstore numbers suggest that July was a particularly good month for online sales, likely boosted by Amazon’s Prime Day. This is great news from a volume standpoint for parcel companies, but less encouraging for truckload shipments, which tend to benefit from stronger brick and mortar store performance.

It’s also worth noting that many of the goods that were affected by the U.S.-China trade rift to this point have been industrial supplies and components instead of finished consumer goods. As a result, domestic manufacturing has not benefited much from strong domestic consumer demand, as the stronger dollar encourages more imports of consumer goods from abroad.

For the manufacturing sector, the decline in July continues a trend that began at the end of last year. Industrial output and manufacturing declined outright in both the first and second quarters of 2019, which is the first time that has happened since 2016. Third quarter results so far have not fared much better, with these industrial production results joining the softer survey results from the Institute of Supply Management and regional Fed surveys to paint a weak picture of the manufacturing sector. Most of the survey data has not crossed into contractionary territory outright yet, but there is little to suggest any rebound in manufacturing activity is upcoming months