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U.S. Manufacturing Production Unexpectedly Contracts in January

The forecast called for no change, but the industry saw a 0.9% drop, following a 0.8% December decline.

by Katia Dmitrieva

U.S. factory production unexpectedly contracted in January, shrinking the most in eight months on weakness in the automotive sector and indicating a weak start to the year as headwinds including a trade war with China weighed on factories.

Manufacturing output fell 0.9% after a downwardly revised 0.8% increase in the prior month, Federal Reserve data showed Friday. The results missed the Bloomberg survey median forecast calling for an unchanged reading. Total  industrial production, which also includes mines and utilities, contracted 0.6% after a revised 0.1% rise that was also revised down.

Key Insights

The data point to cooling across the manufacturing sector, consistent with analyst forecasts for a broader moderation in the U.S. economy this year. The trade war with China is putting some investment on hold and raising costs for factories, potentially overshadowing wage gains and a strong labor market. The decline was driven by an 8.8% decline in motor vehicles and parts, with assemblies falling from the best pace in more than two years to the weakest reading since May. Most industries were little changed while information processing, construction supplies and defense equipment posted losses. The report contrasts with the Institute for Supply Management's survey showing measures of new orders and production snapped back in January following steep declines the prior month. 

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Capacity utilization, measuring the amount of a plant that is in use, decreased to 78.2% from 78.8%. Utility output increased 0.4% after shrinking 6.9% the prior month. Mining production advanced 0.1%. Machinery production fell 0.5%, while output of consumer goods fell 0.7%. The Fed's monthly data are volatile and often get revised. Manufacturing, which makes up 75% of total industrial production, accounts for about 12% of the U.S. economy.

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