U.S. manufacturing output drops as chip shortage weighs on auto production

Output at U.S. manufacturing dropped unexpectedly in June as automobile production dropped amid the global chip shortage.

Manufacturing output slumped 0.1% last month after growing 0.9% in May, the Federal Reserve said on Thursday.

Economists’ estimated that manufacturing output would climb 0.2% in June. Production at manufacturing plants grew at a 3.7% annualized rate from April to June after growing at a 2.3% pace in the first quarter.

Manufacturing accounts for 11.9% of the U.S. economy and is currently being supported by massive fiscal stimulus and low-interest rates from the government.

The strong demand is putting a strain on the supply chain and leaving manufacturers grappling with shortages of raw materials and labor.

Vehicle production declined 6.6% last month. The production cuts have increased the demand for used cars and trucks, the primary cause of consumer inflation in recent months.

Auto and parts production fell at a 22.5% rate in the second quarter.

Excluding automobiles, manufacturing output increased 0.4% in June. The overall drop in manufacturing production was offset by a 1.4% jump in mining and a 2.7% rebound in utilities.

Mining was driven by higher oil prices, which supports drilling activity. Hot temperatures in large parts of the country fueled demand for utilities.

Industrial production grew at a 5.5% rate in the second quarter after advancing at a 3.6% pace in January-March.

Capacity utilization for the manufacturing sector, which measures how much the firms use their resources, fell 0.1 percentage point to 75.3% in June. Overall capacity use for the industrial sector 0.3 percentage point to 75.4%. It is 4.2 percentage points below its 1972-2020 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.

Picture Credit: Financial Express