Date: 17 Aug 2020
What’s new. On August 14, the Federal Reserve reported that industrial production in the US rose 3.0% mom in July (consensus: 3.0%), down from 5.4% in June. Manufacturing production increased 3.4% mom, above the consensus of 3.0, slowed from 7.2% in June. The figures show the US industrial sector continued its steady recovery in July, while the manufacturing expansion is consistently with the July ISM survey data. However, unlikely retail sales, despite the recent gain, industrial output remains 8.4% below the pre-COVID level in February.
Auto production led the rebound. Consumer durable goods production rebounded 14.6% mom July, slowed from June’s 40.8%, but remained at a robust pace. This mainly reflects the rapid pick up of consumer demand on durable goods after the lockdown lifted. Among which motor vehicles and parts production surged again by 28.3% mom, down from 118.3% in June, but that figure was too high to be sustainable. Auto production is already back to the pre-pandemic level now, and given the latest retail figure suggesting auto retail sales had stalled in July, we suspect auto production is also likely to lose some momentum over the coming months. Elsewhere, transit business equipment rebounded 24.1% mom (June: 74.6%), while consumer parts materials rose 15.4% mom (June: 46.6%)
Total manufacturing production continued to recover in July but is still 8% short of the February level. Aerospace and transport equipment output increased 7.5% mom but remained 20.5% lower than the level of a year ago. Given the latest announcement from Boeing of reducing production to only six per month for 787 and two per month for 777/777X, and the FAA is yet to re-approve the 737MAX series, we reckon aerospace output is likely to stay depressed over coming months.
Mining production growth finally back to positive territory, increased by 0.8% mom in July, after five consecutive months of decline, and remains 18.4% below the pre-pandemic level. However, oil and gas well drilling output is still in terrible shape, down again by 8.0% mom in July, after five months of slump, it is now 79% short of the February level. Utilities production grew 3.3% mom in July, where electric made the main contribution (3.9% mom), as unusually warm temperatures increased the demand for air conditioning.
Capacity utilisation increased to 70.6% in July from 68.5% in June, better than the consensus of 70.3%, but remains far below the February level of 76.9%. Yet utilities utilisation climbed above the pre-pandemic level due to excessive use of electricity, mining capacity is 15.6pts below February.
Our view: Looking ahead, industrial production has recovered steadily in the last three months since lockdown lifted, despite it remains well below the pre-pandemic level. However, the output recovery so far is mainly due to the previous shutdown of factories and accumulated backlogs created by the initial pent-up demand. Latest retail sales data shows consumer spending had lost some momentum in July, hence downside risks remain sizable despite the continued slow pace of rebound in industrial sector.
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