WASHINGTON (Reuters) – Production at U.S. factories edged up in February and output in the prior month was stronger than previously thought, but manufacturing continues to struggle under the weight of higher interest rates.
Manufacturing output gained 0.1% last month, the Federal Reserve said on Friday. Data for January was revised up to show production at factories increasing 1.3% instead of the previously reported 1.0% rise. Economists polled by Reuters had forecast factory production would fall 0.2%.
Output fell 1.0% on a year-on-year basis in February.
Manufacturing, which accounts for 11.3% of the U.S. economy, contracted in the third and fourth quarters of 2022 as higher borrowing costs undercut demand for goods, which are typically bought on credit. Spending is also shifting away from goods to services.
The Institute for Supply Management’s measure of national manufacturing activity has contracted for four straight months. Though activity appeared to stabilize at weaker levels in February, a rebound is unlikely. Regional Fed surveys this week showed manufacturing in New York state and the mid-Atlantic area remained depressed in March.
Financial markets expect the Fed to raise interest rates by another quarter of a percentage point next Wednesday, according to CME Group’s FedWatch tool. But banking sector instability following the collapse of two regional U.S. banks and problems at Credit Suisse has prompted some speculation that the U.S. central bank could pause its most aggressive monetary policy tightening campaign since the 1980s.
The Fed has raised its benchmark overnight interest rate by 450 basis points since last March from the near-zero level to the current 4.50%-4.75% range.
Last month, there were increases in the output of consumer goods, defense and space equipment, and materials. But production of business equipment, construction supplies and business supplies declined.
Durable manufacturing production nudged up 0.1%, while nondurable manufacturing output climbed 0.2%.
Mining output fell 0.6%, with oil and gas well drilling dropping 3.1%. Mining production had increased 2.0% in January, ending three straight monthly declines.
Utilities production rebounded 0.5% after plunging 10.1% in January as unseasonably mild temperatures curbed demand for heating. The small gain in manufacturing, together with the rise in utilities, offset the drop in mining, leaving overall industrial production unchanged last month. Industrial output rose 0.3% in January.
Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, dipped 0.1 percentage point to 77.6% in February. It is 0.6 percentage point below its long-run average. Overall capacity use for the industrial sector was unchanged at 78.0%. It is 1.6 percentage points below its 1972-2022 average.
Officials at the U.S. central bank 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.
(Reporting by Lucia Mutikani; Editing by Paul Simao)
