Factory output ticks up for July

Productivity rises as labor costs fall

A truck driver secures a roll of steel to his flatbed at the Nucor Corp. steel plant in Ghent, Ky., last month.
A truck driver secures a roll of steel to his flatbed at the Nucor Corp. steel plant in Ghent, Ky., last month.

U.S. factory output expanded in July for a second consecutive month, indicating a steady outlook at the start of the second half of 2018, Federal Reserve data showed Wednesday.

The report showed gains in manufacturing of durable goods, including machinery, vehicles, computers and electronics. Factory production was 2.8 percent higher than its level a year ago, indicating steady demand -- underpinned by lower corporate and consumer taxes and a strong job market -- will keep supporting factory activity.

The results also reflected a return to more typical levels of automobile production in July, after a fire-related disruption at an auto parts supplier depressed truck assemblies in May and later gave an outsized boost in June.

The Federal Reserve said Wednesday that overall industrial production -- which includes output at mines and utilities as well as factories but excludes autos and parts -- increased 0.1 percent in July after climbing 1 percent in June. Production slid 0.3 percent at mines and 0.5 percent at utilities.

Production of motor vehicles increased 0.9 percent, following a gain of 7.6 percent in June and a decline of 8.5 percent in May.

It may be hard to sustain last quarter's momentum as producers face rising costs for materials as a result of the trade war and supply constraints amid strong demand. President Donald Trump's imposition of tariffs on steel imports and on $34 billion of products from China has sparked retaliatory duties, which may limit exports. And the dollar has increased in value against other currencies, which could further hurt exports by making U.S. products more expensive overseas.

"The appreciation of the dollar so far this year means that growth in the factory sector appears set to slow further over the coming months," Michael Pearce, senior U.S. economist at Capital Economics, said in a research note.

The factory-use rate of 75.9 percent is still 2.4 percentage points below its long-run average, the Fed said in the report.

The Fed's monthly data are volatile and often get revised. Manufacturing, which makes up 75 percent of total industrial production, accounts for about 12 percent of the U.S. economy.

Utility output fell 0.5 percent, the third consecutive decline, after a 0.7 percent drop the previous month.

Production of consumer goods was unchanged, after a 0.9 percent gain, and output of business equipment rose 0.8 percent, while construction output fell 0.1 percent after declining 0.3 percent in June.

Also Wednesday, the Labor Department reported that U.S. worker productivity grew at an annual rate of 2.9 percent in the second quarter, the fastest pace in more than three years, while labor costs actually fell.

The April-June increase in productivity followed a much weaker 0.3 percent rate of gain in the first quarter, the report said. It was the strongest advance since a 3.1 percent gain in the first quarter of 2015. Labor costs actually fell at a 0.9 percent rate in the second quarter, the weakest showing in nearly four years.

Productivity, a key factor determining how fast the economy can grow and how much living standards can increase, has been anemic throughout this expansion. The strong second-quarter gain is expected to be only a temporary blip.

Productivity is the amount of output per hour of work. The big jump in the second quarter reflected the fact that the gross domestic product, the country's total output of goods and services, accelerated to a growth rate of 4.1 percent in the second quarter, the strongest quarterly gain since 2014.

That second-quarter acceleration was accompanied by a much smaller gain of 1.9 percent in the number of hours worked. The combination of stronger output and a smaller increase in hours worked led to the strong increase in productivity.

However, economists do not expect the second-quarter improvement will significantly alter the long-run trend of very meager gains in productivity.

For all of last year, productivity grew by 1.1 percent and that followed a minuscule 0.1 percent rise in 2016.

Andrew Hunter, U.S. economist for Capital Economics, noted that "quarterly productivity growth tends to be quite volatile." He said while the second-quarter productivity gain was strong, the average gain for the past four quarters has been 1.3 percent, no change from the lackluster pace of the past decade.

Similarly, economists said that while labor costs dropped by 0.9 percent in the second quarter, this decline had followed a 3.4 percent rise in the first quarter with the 1.9 percent gain over the past year a better reflection of how labor costs are performing.

Finding a solution to the slowdown in productivity growth is one of the key economic challenges facing the country. Productivity gains allow companies to pay workers more without having to raise the cost of their products, which can exacerbate inflation.

Information for this article was contributed by Shobhana Chandra and Jordan Yadoo of Bloomberg News; and by Paul Wiseman and Martin Crutsinger of The Associated Press.

Business on 08/16/2018

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