A Second Win for Industrial Production in September
Order backlogs are easing.
Activity in the industrial sector grew by 0.4% from August to September, well above expectations for an increase of 0.1%. The September rise was driven by a 0.4% increase in the manufacturing sector and a 0.6% rise in mining production.
Consumer goods production grew strongly in September, rising by 0.6%. Production of both durable and nondurable consumer goods rebounded, led by strong gains in home electronics, appliances and furniture, and clothing. Automotive products rose by 0.5%. While semiconductor supply chain disruptions appear to have eased, the supply chain for motor vehicle production has not fully healed. Demand for consumer goods ended the third quarter on a strong footing, but higher rates and weakness in the housing market are expected to weigh on big-ticket purchases at the end of the year.
Production of business equipment and supplies slowed in September. Demand for both equipment and supplies had a strong start to the third quarter, but higher rates are starting to weigh on categories that feed into economy-wide investment.
The index for utilities dropped for a second straight month and declined in the third quarter as high energy prices filtered through to utility demand. While overall the September report showed strong growth in many areas, forward-looking data, and the expectation of additional tightening in financial conditions point to a slowdown in industrial activity in the fourth quarter.
The capacity utilization rates for overall industrial production and manufacturing both rose in September. They remain above long-term averages but should be weighed against recent survey data that suggest a slowdown in hiring is likely to take hold in the fourth quarter. Order backlogs are easing; they have been an important source of demand over the last couple of months as supply chain pressures eased and manufacturers serviced pent-up demand.
While the August report showed notable activity in the production of consumer goods, there are signs that demand for industrial products will start to cool. The latest Institute for Supply Management (ISM) manufacturing survey showed a decline in the new orders index. The Federal Reserve is expected to increase the policy rate by another 1.5 percentage points by year-end, raising borrowing costs significantly. These forces are likely to conspire to slow activity in the industrial sector at the end of 2022.