Industrial Production in U.S. Increased 0.2% in July

By Bob Willis

Aug. 15 (Bloomberg) -- Industrial production in the U.S. unexpectedly rose in July, helped by gains in automobiles, metals and machinery.

Output at factories, mines and utilities rose 0.2 percent last month after a 0.4 percent gain in June, the Federal Reserve reported today in Washington. Capacity utilization, which measures the proportion of plants in use, increased to 79.9 percent from 79.8 percent.

Demand for autos increased for a third month, reflecting a continued rebound from a strike at an auto-parts supplier. Gains elsewhere signal demand from overseas continued to boost orders even as U.S. consumer and business spending weaken.

``While export growth looks set to remain solid at least over the near term, an increasingly constrained consumer, deepening woes for the housing sector, and a desire to pare inventories will all weigh on manufacturing output,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York.

Gains in auto output were ``due to rebounds after the end of a strike'' and did ``not reflect fundamental strength,'' he said.

Output was forecast to be unchanged according to the median estimate of 79 economists surveyed by Bloomberg News after a previously reported gain of 0.5 percent in June. Projections ranged from a decline of 0.5 percent to a gain of 0.4 percent.

Capacity utilization was forecast to fall to 79.8 percent from a previously reported 79.9 percent for the prior month, according to the survey median.

Risk of Bottlenecks

Economists track plant operating rates to gauge factories' ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher. The utilization rate has averaged 81 percent over the past 30 years.

Another report earlier today showed manufacturing in the New York region unexpectedly expanded in August for the first time in four months. The Fed Bank of New York's general economic index rose to 2.8 from minus 4.9 in the prior month.

Manufacturing, which accounts for about four-fifths of the industrial production report, rose 0.4 percent last month after a 0.1 percent increase in June. Excluding autos, factory output climbed 0.2 percent after falling 0.2 percent.

Production of motor vehicles and parts increased 3.6 percent after rising 4.8 percent in June.

The resolution of a three-month strike at American Axle & Manufacturing Holdings Inc., General Motors Corp.'s largest axle supplier, may explain the rise in output even as sales slump. The walkout, which ended May 26, had halted production of about 330,000 units at GM plants.

Falling Demand

GM, faced with falling demand for SUVs and pickup trucks, is expanding early retirement programs and cutting output and staff to lower costs. ``We're in a very difficult economic environment,'' GM Chief Executive Officer Rick Wagoner said in an interview Aug. 1 in Detroit.

Sales of cars and light trucks in July slid to a 12.5 million annual rate, the lowest level since 1993, according to industry figures.

Output of machinery increased 0.7 percent last month and production of primary metals rose 0.8 percent.

Production of consumer goods increased 0.3 percent, led by the rebound in autos.

The production figures countered other reports that have indicated manufacturing stagnated. The Institute for Supply Management's factory index fell to 50 in July, the dividing line between expansion and contraction.

One reason manufacturing hasn't suffered even more is that exports have been growing. Now, even that support is in question.

Economy Contracted

Europe's economy contracted in the second quarter for the first time since the introduction of the euro almost a decade ago, the European Union announced this week. Japan's economy also contracted last quarter as consumers spent less and exports fell, the government said on Aug. 13.

The U.S. economy, the world's largest, will grow at an average 0.7 percent annual pace from July through December, half the gain in the first six months of the year, according to the median forecast of economists surveyed by Bloomberg this month.

Mining production increased 0.9 percent in July, after rising 0.9 percent in June. Utilities output decreased 1.9 percent after rising 2.3 percent.

To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net