Industrial Production and Capacity Utilization Scream Weakness Into Fed Decision on Interest Rates

If the investing community wanted good news on the reports for industrial production and capacity utilization, they are going to have to search elsewhere. With 2016 being a presidential election year, reports like this are also going to interfere with the real need for companies to rush out and build new factories and go hire a slew of new workers.

Industrial production was very weak, at −0.4% in May. Bloomberg was looking for a reading at just −0.1%, while Reuters was calling for a reading of −0.2%. April’s industrial production reading was revised lower to a gain of 0.6% from the preliminary reading of a 0.7% gain.

Manufacturing was also weak at −0.4%. Bloomberg was calling for a gain of 0.1%. April’s reading was revised to a gain of 0.2% from the preliminary 0.3% gain.

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Wednesday’s report offered some explanation:

Declines in the indexes for manufacturing and utilities in May were slightly offset by a small gain for mining. The output of manufacturing moved down 0.4 percent, led by a large step-down in the production of motor vehicles and parts; factory output aside from motor vehicles and parts edged down 0.1 percent.

Where this report sort of goes to hell in a handbasket is in capacity utilization. Capacity fell to 74.9% in May. Both Reuters and Bloomberg were expecting a 75.2% reading. Also, April’s capacity use was revised lower to 75.3% from the the 75.4% preliminary reading. This rate is now 5.1 points under the historical average.

Capacity utilization’s highest component was utilities, at 77.5%. That is unfortunately lower than the 78.4% from April. Manufacturing was at 74.8%, and mining was at 73.1%. Again, these all need to be much higher for businesses to feel a need to build newer factories and plants and to go hire lots of newer workers.

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Industrial production and capacity utilization numbers are released by the Federal Reserve. The Federal Open Market Committee (FOMC) decision on interest rates is not getting the growth nor the inflation needed to justify a hike. Either way, you will know what the FOMC decision and view on rates looks like around 2:00 p.m. Eastern Time.