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Key Takeaways
- Multiple reports on Thursday depicted weakness in the manufacturing and industrial sectors of the economy.
- Manufacturing activity is often used as a measure of economic growth, as high consumer demand will cause factories to produce more goods.
- Some areas of weakness in the sector can be traced back to the Federal Reserve holding its influential interest rate at a record high.
Promising reports on inflation and retail sales this week are giving some market participants added confidence. But it isn’t all good news for the economy, as a spate of reports on manufacturing showed signs of weakness in that sector, with data pointing to slowdowns in the labor market.
Both industrial production and manufacturing capacity—measurements that track factory output —fell in July and were lower than economists expected, Federal Reserve data released Thursday showed. Additionally, monthly surveys of manufacturers conducted by the New York and Philadelphia Federal Reserve banks showed softness in the sector.
“Today brought a batch of manufacturing data that was rather grim,” wrote Wells Fargo economists Shannon Seery Grein and Tim Quinlan. “Manufacturing activity continues to flash recessionary signals, but other data, including July retail sales, suggest some portions of the economy can continue to chug along even as manufacturers face a more precarious environment.”
The manufacturing industry is often viewed as an indicator of the broader economy’s health as more goods are produced when demand is high and the economy is growing. However, economists said much of the weakness in manufacturing can be attributed to the Federal Reserve’s restrictive policy.
What’s the Fed Got To Do With It?
The Federal Reserve has held its influential fed funds rate at its highest level in more than two decades in an effort to discourage spending and in turn tame inflation. That’s increased the cost of all kinds of borrowing, which has led to some of the main drivers of weakness in manufacturing.
For example, slagging automobile production is a key culprit in the depressed manufacturing activity. Vehicle manufacturing steeply dropped in July and is down nearly 10% over the past year. Economists blamed high interest rates on auto loans for the decline.
“Because consumers are aware that interest rates are set to decline in the near future, they may be holding off on making the big-ticket purchases that typically involve credit,” wrote Moody’s analyst Matt Colyar.
The Federal Reserve is widely expected to ease interest rates at its upcoming September meeting, which economists have long said could bring some relief to manufacturers.