Factory output increase points to recovery

More good news from the nation's industrial sector: U.S. industrial production rose 0.8 percent in August -- its second straight monthly rise -- the U.S. Federal Reserve announced Tuesday.

What's more, output at U.S. factories in July was revised up to 1.0 percent from the previously released 0.5 percent; industrial production declined 0.4 percent in June.

Further, capacity utilization also increased to 69.6 percent in August from a revised 69.0 percent in July. However, capacity utilization is still 11.3 percent below its average for the 1972-2008 period. Capacity utilization had hit a record low 68.1 percent in June.

Also, at 97.4 percent of its 2002 average, industrial production is still 10.7 percent below its level recorded a year ago.

Economists surveyed
by Bloomberg News had expected August industrial production to rise 0.7 percent and the utilization rate to rise to 69.0 percent.

Broad-based industrial improvement

The August factory output was propelled by gains almost across the board. Utilities output rose 1.9 percent, mining increased 0.5 percent, consumer goods increased 1.3 percent, non-industrial supplies rose 0.4 percent, and business equipment rose 0.6 percent. Construction output was flat in August.

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 inflation.

Economic Analysis: Look for U.S. stock markets to cheer the August industrial production data. The August data provides further evidence that the manufacturing sector is recovering, although not at as fast a rate as the U.S. Federal Reserve wants: the recession is bottoming, and the nation is entering a gradual recovery. Further, the August data also highlights how low inventories could boost U.S. GDP: with low inventories, factories will ramp-up production in order to avoid being product-short as demand increases during the recovery, and that "re-stocking of warehouses" leads to increased GDP, the hiring of additional workers, ordering supplies, and so on.

However, investors should maintain the proper perspective regarding the state of the U.S. economy: the U.S. will need years of industrial production increases to get output -- and industrial jobs -- back to where they need to be to achieve economic prosperity.

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