Production at US factories fell more than expected in December and output in the prior month was weaker than previously thought, indicating that manufacturing was rapidly losing momentum as higher borrowing costs hurt demand for goods.

Manufacturing output dropped 1.3 per cent last month, the Federal Reserve said on Wednesday (Jan 18). Data for November was revised lower to show production at factories decreasing 1.1 per cent instead of the previously reported 0.6 per cent. Economists polled by Reuters had forecast factory production would decline 0.3 per cent.

Output fell 0.5 per cent on a year-on-year basis in December. It decreased at a 2.5 per cent annualised rate in the fourth quarter.

Higher interest rates are undercutting demand for goods, which are mostly bought on credit. The dollar’s appreciation and a softening in global demand are also hurting manufacturing, which accounts for 11.3 per cent of the US economy. In addition, spending is also shifting back to services.

National manufacturing has been shrinking since November, according to data from the Institute for Supply Management. The decline appears to have deepened as a report from the New York Federal Reserve on Tuesday showed manufacturing in New York state plunged in January to levels last seen in May 2020.

The Fed last year raised its policy rate by 425 basis points from near zero to the 4.25 per cent – 4.50 per cent range, the highest since late 2007. In December, the US central bank projected at least an additional 75 basis points of increases in borrowing costs by the end of 2023.

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Production at auto plants fell 1.0 per cent last month. There were also big declines in the output of machinery and wood products.

Mining output dropped 0.9 per cent after declining 1.2 per cent in November. Utilities production increased 3.8 per cent as a cold snap across the country boosted demand for heating.

That offset some of the weakness in manufacturing and mining, leading to a 0.7 per cent fall in overall industrial production. Industrial output decreased 0.6 per cent in November. It fell at a 1.7 per cent rate in the fourth quarter.

Capacity utilisation for the manufacturing sector, a measure of how fully firms are using their resources, fell 1.0 percentage point to 77.5 per cent in December. It is 0.7 percentage point below its long-run average.

Overall capacity use for the industrial sector fell 0.6 percentage point to 78.8 per cent. It is 0.8 percentage point below its 1972-2021 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