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US manufacturing production rises in August, but momentum slowing

[WASHINGTON] US factory production increased for a fourth straight month in August, but the recovery is showing signs of strain, suggesting business investment in equipment could remain depressed through the end of the year as the Covid-19 pandemic drags on.

The report from the Federal Reserve on Tuesday added to data on the labour market that has indicated a stall in overall economic activity because of the coronavirus' persistence and fading fiscal stimulus. The ebbing economic recovery, accompanied by firming inflation, is likely to dominate the US central bank's two-day policy meeting, which started on Tuesday.

"It is looking increasingly like the recovery in factory production will stall in coming months if no one from Washington is going to ride to the rescue with another pandemic stimulus package," said Chris Rupkey, chief economist at MUFG in New York. "The coronavirus has made the public cautious and this uncertainty is keeping factories from opening back up completely." Manufacturing production rose 1.0 per cent last month after advancing 3.9 per cent in July. The Fed noted that "the gains for most manufacturing industries have gradually slowed since June." Factory output remains 6.7 per cent below its February level.

Government financial aid to businesses and the unemployed has virtually dried up, and talks on another package are at an impasse. At least 29.6 million people were on unemployment benefits in August. Government money was credited for the sharp rebound in economic activity. Cheaper crude oil because of the pandemic is also hurting oilfield services and equipment firms.

The International Energy Agency on Tuesday slashed its 2020 oil demand forecast, warning "the outlook appears even more fragile ... the path ahead is treacherous amid surging Covid-19 cases in many parts of the world." Economists polled by Reuters had forecast manufacturing output would rise 1.2 per cent in August.

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Business spending on equipment has declined for five straight quarters and could remain under pressure because of lower oil prices.

Stocks on Wall Street were trading higher as upbeat data from China revived optimism about an economic rebound and investors looked for more stimulus from the Fed.

Last month, production of long-lasting manufactured goods increased 0.7 per cent. Motor vehicle production, however, dropped 3.7 per cent after accelerating 31.7 per cent in July. There were increases in the output of machinery, furniture, computer and electronic products as well as electrical equipment, appliances and components.

Production of apparel and leather products increased as did the output of plastics and rubber goods.

The rise in manufacturing offset declines in both mining and utilities output, lifting industrial production 0.4 per cent in August.

Industrial output rose 3.5 per cent in July.

Mining production fell 2.5 per cent in August as Tropical Storm Marco and Hurricane Laura caused what the Fed said were "sharp but temporary" drops in oil and gas extraction and well drilling. Utilities output fell 0.4 per cent, with small decreases in both electric and gas utilities.

Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, increased to 70.2 per cent in August from 69.5 per cent in July. Overall capacity use for the industrial sector ticked up to 71.4 per cent from 71.1 per cent in July. It is 8.4 percentage points below its 1972-2019 average.

Officials at the US central bank tend to look at capacity use measures for signals of how much "slack" remains in the economy - how far growth has room to run before it becomes inflationary.

REUTERS

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