U.S. Industrial Production Unexpectedly Flat Amid Steep Drop In Utilities Output

With a steep drop in utilities output offsetting increases in manufacturing and mining output, the Federal Reserve released a report on Tuesday showing U.S. industrial production was unexpectedly flat in the month of June.

The Fed said industrial production was unchanged in June after climbing by 0.4 percent in May. Economists had expected production to edge up by 0.2 percent.

Industrial production was unchanged as utilities output plunged by 3.6 percent, with milder-than-usual temperatures reducing demand for air conditioning.

On the other hand, the report said manufacturing output climbed by 0.4 percent, partly reflecting a 2.9 percent jump in production of motor vehicles and parts.

Excluding autos, production rose by 0.2 percent, although Michael Pearce, Senior U.S. Economist at Capital Economics, noted manufacturing output still declined by 2.2 percent annualized in the second quarter.

"With the global backdrop still weak and the survey evidence consistent with manufacturing output declining, we expect the manufacturing sector to remain weak in the second half too," Pearce said.

The Fed said mining output also rose by 0.2 percent, but Pearce said output in the sector is likely to begin declining modestly in the second half of the year unless the recent rally in oil prices continues.

The report also said capacity utilization for the industrial sector edged down to 77.9 percent in June from 78.1 percent in May. Economists had expected capacity utilization to come in unchanged.

Capacity utilization in the mining sector crept up to 75.9 percent, while capacity utilization in the mining sector dipped to 91.5 percent and capacity utilization in the utilities sector slumped to 74.6 percent.

"Rising spare capacity reduces the need for firms to invest and will help maintain downward pressure on core inflation, both of which will be key reasons why the Fed is likely to cut interest rates in the coming weeks," said Pearce.