Industrial Production Rises for the 14th Straight Month

The nation's factories continue to show signs that they will support economic growth, as industrial production rose 0.2% in August, the U.S. Federal Reserve announced Wednesday.

August marked the 14th consecutive month of industrial output growth. Capacity utilization rose to 74.7% in August from July's revised 74.6% level. Also, the 74.7 utilization rate is 4.7% higher than a year ago, but is still 5.9 percentage points below its 1972-2009 average.

A Bloomberg survey had expected industrial production to rise 0.2% in August after a revised 0.6% increase in July, down from the previously-released 1.0% July increase. That same survey also had expected the capacity utilization rate to rise to 74.8%. Industrial production rose 0.1% in June and 1.1% in May.

Decent Manufacturing Output Gain, Ex-Autos

August's industrial production rise is encouraging for the economic recovery's durability because it contained a healthy gain in manufacturing output, excluding autos. Excluding the often volatile auto component, manufacturing output rose 0.5% in August; overall manufacturing output rose 0.2%.

Meanwhile, mining output increased 1.2% and utilities output fell 1.5% in August.

Economists, business executives and institutional investors pay attention to industrial production and capacity utilization data because although manufacturing accounts for less than 20% of U.S. GDP, it accounts for a considerable portion 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.

Separately, business activity in the New York region slowed more than expected in September, as the Empire State Manufacturing Index fell to 4.14 from 7.1 in August, the New York Federal Reserve announced Wednesday. The 4.14 reading indicates that conditions are improving, but at a slower rate than earlier this year. A Bloomberg survey expected the index to dip to 5.0 in September.

Also, import prices rose 0.6% in August -- their largest increase since April, the U.S. Labor Department announced Wednesday. The gain was skewed higher by imported fuel prices, which rose 1.7%. Excluding the often-volatile fuel component, import prices rose 0.3% during the month. However, even with August's import price jump, import prices are up just 4.1% in the past year -- the smallest 12-month rise since November 2009. Meanwhile, export prices increased 0.8% in August -- their biggest gain since April. Over the past year, export prices are up 4.1%.

More Modest Industrial Output Growth

August's industrial production statistic represents a modestly positive data point for the market's bulls. It suggests manufacturing will continue to add to U.S. GDP, but at a more modest pace than the previous six months. The top line 0.2% increase was skewed lower by the decline in auto production. Hence, investors will likely focus on the 0.5% ex-automobile production increase because some pull-back in auto production was expected in August, due to the fact that auto and auto parts production surged in July.

However, August's industrial production data was offset by the disappointing September Empire State manufacturing reading, as investors had expected a stronger performance. Moreover, the latest Empire State statistic provides further evidence that industrial output will continue to increase, but at a slower pace than the previous six months.