U.S. Industrial Production Unexpectedly Surged in July

Don't write-off the U.S. economic recovery just yet. The nation's industrial sector, which has led the expansion but cooled recently, showed signs of renewed life in July, with industrial production climbing a better-than-expected 1%, the U.S. Federal Reserve announced Tuesday.

Capacity utilization jumped to 74.8% in July from 74.1% in June. The 74.8% utilization rate is 5.7% higher than a year ago, but is still 5.7 percentage points below its 1972 to 2009 average of 80.5%.

A Bloomberg survey had expected industrial production to rise 0.6% in July and the capacity utilization rate to rise to 74.5%. Industrial production fell 0.1% in June and rose 1.3% in May.

Manufacturing Output Rose Sharply in July

July's rise in industrial production is especially encouraging because it was concentrated in the manufacturing and mining sectors. Manufacturing output, aided by increased vehicle production from a rebounding U.S. auto sector, increased 1.1%. Mining output increased an impressive 0.9%.

Utilities output, which surged 2.3% in June and dominated that month's industrial activity, rose just 0.1% in July.

Industrial production rose 6.6% in the second quarter, slightly lower than the 7% gains recorded in both the first and fourth quarters of 2009.

A Data Point for the Market's Bulls

July's industrial production totals represent good news for stock market bulls. The housing sector may be sluggish, and retail sales may be tepid, but activity in the nation's industrial sector is still increasing at a healthy rate, and last month's data have lessened concern that activity in the sector that's led the recovery to date is slowing.

Although it's theoretically possible for the economy to grow for years with tepid industrial activity, historically a strong industrial sector has accompanied every robust U.S. economic expansion. And it's easy to understand why: Manufacturing jobs usually pay higher wages than most service sector jobs. That usually leads to rising median and disposable income -- creating the increasing demand that's critical for a sustained economic expansion.

Since housing construction is unlikely to serve as a growth engine in the current expansion (due to the large supply of unsold homes left over from the burst housing bubble), strong conditions in the industrial sector could prove to be critical in the quarters ahead.