U.S. manufacturing fell sharply in January, led by the biggest drop in motor vehicle production since the recession, the latest indication that the economy was losing momentum.
The Federal Reserve’s report on Friday came on the heels of data on Thursday showing retail sales tumbling by the most in more than nine years in December. The string of weak reports together with tame inflation are supportive of the Fed’s pledge to be “patient” before raising interest rates further this year.
“It looks like Fed officials were smart to stop their gradual rate hikes as the economy seems to have entered a soft patch,” said Chris Rupkey, chief economist at MUFG in New York.
Manufacturing production slumped 0.9 per cent in January, the biggest drop in eight months. Data for December was revised down to show output at factories rising 0.8 per cent instead of the previously report 1.1 per cent surge. Manufacturing accounts for about 12 per cent of the U.S. economy.
Motor vehicle and parts production tumbled 8.8 per cent last month, the largest drop since May 2009, when the economy was in recession. Motor vehicle assemblies fell to an eight-month low rate of 10.6 million units.
Auto makers are cutting back on production to manage bloated inventories of some models in anticipation of declining sales this year. Production is also dropping as a few plants are changing over to new models.
But even stripping out motor vehicle production, manufacturing output decreased 0.2 per cent in January. Factory activity is slowing as some of the boost to capital spending from last year’s $1.5 trillion tax cut package fades.
In addition, a strong dollar and cooling growth in Europe and China are hurting exports. Lower oil prices are also slowing purchases of equipment for oil and gas well drilling.
While a separate report from the New York Fed on Friday showed factory production in New York state picking up in February after cooling for two straight months, the pace remained close to a two-year low. The New York Fed’s Empire State business conditions index rose to a reading of 8.8 from 3.9 in January.
“Manufacturing output growth will probably continue to trend lower over the coming months,” said Andrew Hunter, a senior U.S. economist at Capital Economics in London.
U.S. stocks were higher amid growing optimism over trade talks between Washington and Beijing. The dollar rose marginally against a basket of currencies, while U.S. Treasury prices fell.
WEAK IMPORT PRICES
In a third report on Friday, the Labor Department said import prices decreased 0.5 per cent last month as the cost of petroleum products fell and a strong dollar weighed on prices of motor vehicles and consumer goods. Import prices dropped by an unrevised 1.0 per cent in December.
Import prices declined 3.1 per cent over the last three months, the biggest three-month decrease since July-October 2015. Economists polled by Reuters had forecast import prices dipping 0.1 per cent in January.
In the 12 months through January, import prices tumbled 1.7 per cent. That was the biggest annual decline since August 2016 and followed a 0.5 per cent drop in December.
Data this week showed consumer prices unchanged in January for a third straight month and producer prices falling for a second consecutive month. The inflation reports support the Fed’s recent description of price pressures as being “muted.”
The Fed kept interest rates unchanged last month and discarded promises of “further gradual increases” in borrowing costs in its policy statement.
“Import prices suggest that domestic inflationary pressures won’t suddenly build,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Therefore, the Fed has the green light to pause until June, if not longer.”
Last month, prices for imported fuels and lubricants fell 3.2 per cent after plunging 8.6 per cent in December. Prices for imported petroleum dipped 0.1 per cent after tumbling 10.7 per cent in December.
Imported food prices fell 0.3 per cent in January after edging up 0.1 per cent in the prior month. Excluding fuels and food, import prices fell 0.2 per cent last month after being unchanged in December. The so-called core import prices were flat in the 12 months through January.
The benign inflation outlook was also underscored by a fourth report from the University of Michigan showing consumers’ long-term inflation expectations fell in early February to the lowest since December 2016. The survey’s consumer sentiment index rose 4.3 points to 95.5 early this month.