U.S. industrial production falls, factory use hits record low

The nation's industrial sector remains mired in the mud. Production at U.S. factories fell for the 16th time in the last 17th months -- with capacity utilization hitting a record low, the U.S. Federal Reserve announced Tuesday.

Output at U.S. factories declined 1.1 percent in May, the Fed said, with factory utilization falling to a record-low 68.3 percent from 69.1 percent in April. In addition, industrial production has now fallen 13.4 percent in the last 12 months-- the largest annual decline for the nation's industrial sector since 1946.

Further, capacity utilization is now 12.6 percentage points below its long-term average, the Fed said. Economists surveyed by Bloomberg News had expected industrial production to decline 1.0 percent and capacity utilization to fall to 68.4 percent in May.

Green shoots, yes, but no roaring bull

Bruce Kasman, chief economist for JPMorgan Chase, said all the talk about the need to raise interest rates on a strengthening economy is premature.

"Current policy rates look set to remain appropriate for some time to come," Kasman told Reuters Tuesday.

Joshua Shapiro, chief U.S. economist for Maria Fiorini Ramirez Inc. in New York, concurred, citing weak aggregate demand.

"The rate of decline has slowed, but there are lots of problems that have yet to be cleaned up," Shapiro told Bloomberg News Tuesday. "We're going to be bouncing along the bottom for a protracted period of time."

Investors should pay attention to industrial production and capacity utilization data because although manufacturing accounts for less than 20 percent of U.S. GDP, it accounts for most of the nation's cyclical growth. Continual declines in production point to a softening economy; rising, the reverse. A low capacity utilization rate usually reflects softer demand; a high rate, strong demand, with the potential for increased price pressure.

In May, mining output declined 2.1 percent, utilities declined 1.4 percent, high-tech production dropped 1.9 percent, and motor vehicle output plunged 7.9 percent.

Economic Analysis: When will the contraction in the nation's industrial sector end? Economists are hoping it will be Q2/Q3, but at this juncture that time period looks like an optimistic assessment, not a realistic one. What's clear is that the nation's economy is in the midst of a restructuring.

Without question, a considerable portion of the industrial activity that has been eliminated will not re-appear: it's been shifted to lower-cost production centers overseas -- a globalization era reality. That underscores the need for the United States to identify and create new, value-added industrial, technology sectors (including information technology, infrastructure, health care, biotech, high-end, tech-intensive manufacturing, and renewable energy) to help make up for the loss of classic industrial output and jobs.

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