Slide in U.S. Industrial Production Continues

U.S. industrial production sank by 1.1% in May, slightly more than forecast, and the capacity utilization rate slumped to 68.3%, marking a new record low for the series. April was revised to show a 0.7% decline in production, lower than the 0.5% decline reported earlier.

The weakness was broad-based in May with manufacturing, mining and utilities production all falling. The manufacturing industry was weighed down by weakness in the auto sector, which sagged by 7.9% likely as a reflection of the operation shutdowns that began in early May.

Other areas of manufacturing weakened as well with consumer goods production falling by 0.8% and business equipment off 1.4%. Mining output dropped by 2.1% in line with the strong declines posted in recent months and defied expectations for a turnaround. Utilities output also fell, dropping 1.4% after April's 0.7% increase.

The sharp drop in production in May points to a quarterly dip of about 10% in the second quarter, still a poor showing for the economy but "less bad" than the 19.1% plunge in the first quarter and the fourth quarter's 12.9% decline. This is in line with our general view that the pace of decline in economic activity has started to slow.

The weakening in production has seen capacity usage slump, which is exerting downward pressure on prices as evidenced in this morning's producer price report, which showed core prices (excluding the volatile food and energy components) up 3% over a year earlier, the slowest pace of increase in about a year, while the overall finished goods producer price index was 4.7% lower than in May 2008.

In the near-term, worries about inflation will be skewed to an overshoot on the downside rather than the upside. The data is in line with the reports from the Federal Reserve districts in the recent Beige Book that indicated that prices were steady to falling and that economic conditions remain weak although with some signs that the pace of decline is moderating. Against this backdrop, the Fed will continue to focus on reviving growth, which may lead to an increase in the size of their quantitative easing program to ensure that government yields do not continue to rise.

RBC Financial Group
http://www.rbc.com

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.