US factory production posts biggest fall in 19 months as auto output drops sharply

WASHINGTON – Automakers cut back sharply on production in August, lowering overall factory output and highlighting one of the economy’s weak spots a day before a key Federal Reserve meeting.

Manufacturing production dropped 0.5 per cent, the biggest decline since January 2014, the Federal Reserve said Tuesday. The drop in auto output accounted for most of the decline. Production of computers, airplanes and furniture also fell.

Fed policymakers will begin a two-day meeting Wednesday to consider whether to raise short-term interest rates for the first time in nine years. Slowing overseas growth and the strong dollar, which are holding back factory output, could cause them to delay a rate hike.

“Looking through the swings in auto assemblies, the ongoing weakness in manufacturing is evident,” Michelle Girard, an economist at RBS Securities, said in a note to clients. “Manufacturing is now the weakest sector of the US economy, faced with headwinds of a stronger dollar and weaker global growth.”

Overall industrial production, which includes mining and utilities, dropped 0.4 per cent in August, after a 0.9 per cent rise in July.

Auto production plunged 6.4 per cent, its steepest fall in more than three years, after an outsized gain of 10.6 per cent in July.

Those swings partly reflect difficulties in seasonally adjusting the data and are likely temporary. U.S. carmakers in the past have temporarily closed their plants in July to retool them for new models. Those shutdowns were much shorter this year, boosting production in July and leading to a corresponding drop in August.

Auto sales are strong and on track to top 17 million this year for the first time since 2001.

Utility output rose 0.6 per cent last month, likely because Americans used more air conditioning. Mining production, which includes oil and gas drilling, fell 0.6 per cent.

Factory output has been flat this year, largely because of global headwinds that have cut into exports. The dollar has risen about 14 per cent in value against other currencies in the past year. That makes U.S. products more expensive and therefore less attractive to overseas buyers.

China’s economy is also faltering after decades of breakneck growth. It has been a critical source of demand for American-made industrial machinery, such as mining trucks, construction equipment and agricultural machines. Its slowdown has hit sales and profits for companies like Caterpillar and United Technologies.

Falling oil prices have also dragged down factory output. Crude oil prices, which were around $60 per barrel in the spring, have fallen to about $44. The decline has forced energy firms to curtail drilling, eliminating much of the need for new pipelines and equipment that had boosted factory orders in previous years.

There are signs that some companies are stepping up their investment in machinery and equipment, which is boosting demand for factory goods. Orders received by U.S. factories rose 0.4 per cent in July, after a 2.2 per cent gain in June.

A key category that tracks business investment plans climbed 2.1 per cent in July, the strongest gain in 13 months.