In a significant development, U.S. manufacturing output in June surged to its peak in more than 74 years with motor vehicle production accelerating midst the reopening of businesses. However, the economic recovery is threatened by rising COVID-19 infections.
The rise in manufacturing activity was underscored by another report from the Federal Reserve which showed a pickup in activity through early July; the outlook however remains highly uncertain and will be dependent on how quickly the U.S. economy is able to manage the Wuhan coronavirus pandemic.
Although business have started to resume operations, they are being threatened by a resurgence of a wave of new infections, especially in the highly populated states in the West and the South. The U.S. economy had slipped into recession in February.
“The manufacturing recovery will proceed at a much slower pace compared to the initial, partial snap-back phase,” said Oren Klachkin, lead U.S. economist at Oxford Economics in New York. “The renewed flaring of virus-related uncertainty will add to significant downside risks from sharply curtailed demand, supply chain disruptions and heightened economic uncertainty.”
In a report, the Federal Reserve stated, manufacturing production jumped by 7.2% in June 2020 – the largest gain since March 1947, after climbing 3.8% in May. Despite two straight monthly increases, factory output was 11.1% below its level in February.
Manufacturing activity, which accounts for 11% of the total U.S. economy, contracted at a annualized rate of 47.0% during the second quarter after falling at a 5.5% pace during the January-March period. U.S. manufacturing is gaining on the long term following the Trump Administration taking China to task over its trading practices.
The coronavirus pandemic which emerged from Wuhan, China, has ravaged global supply chains and they continue to remain fragile. The demand for crude oil continues to remain weak, leading to lower prices that are undercutting spending by oil producers on drilling and shaft exploration equipment.
According to economists, business spending is likely to contract during the second quarter – in a fifth straight quarterly decline.
On the upside side, early data for a potential COVID-19 vaccine has lifted Wall Street.
In June 2020, the U.S. economy made broad gains and was boosted by a 105.0% surge in the output of motor vehicles and parts, which was on top of a 120% rise in May. There is a lot more potential for growth given that the output is nearly 25% below its pre-pandemic level.
Excluding autos, manufacturing production increased 3.9%. There were increases in the production of long-lasting consumer goods, business, defense and space equipment.
The surge in manufacturing output combined with a 4.2% increase in utilities offset a 2.9% slump in mining, leading to a 5.4% rise in industrial production in June. That followed a 1.4% gain in May. Oil and gas well drilling fell 18.0% and was about 70% below its year-earlier level.
Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, rose by 4.6 percentage points to 66.9% in June. Overall capacity use for the industrial sector rose 3.5 percentage points to 68.6%. It is 11.2 percentage points below its 1972-2019 average.
“There is little incentive to invest in capex as yet,” said James Knightley, chief international economist at ING in New York. “This is likely to hold back the broader recovery and is a key factor why we doubt the U.S. economy will recover all of its lost output much before the end of 2022.”
Officials at the Fed tend to look at capacity use measures for signals of how much “slack” remains in the economy — how far growth has room to run before it becomes inflationary.