U.S. Manufacturing Gains Momentum Amid Capital Spending Surge
Manufacturing in the U.S. is experiencing a boost thanks to increased capital spending. This surge isn’t just limited to computers; it also spans machinery, electrical equipment, fabricated metals, and aerospace.
According to data from the Federal Reserve, business equipment output climbed by 0.8% in July, marking a 6.6% increase compared to the same month last year. In the second quarter of the year, production accelerated at an annual rate of 12.7%, up from a 7.6% growth seen in the earlier quarter.
This uptick contributed to a 0.2% rise in manufacturing output during July, even as automobile production saw a decline. When excluding vehicles and parts, factory production increased by 0.4%.
Overall industrial production, which encompasses mining and utilities, also rose by 0.2%, a revision upward from June’s reported 0.3% increase.
It’s interesting to note that this growth reflects a more substantial investment-driven expansion in manufacturing compared to the overall rise in factory production. Durable goods production jumped by 0.7% in July, a 3.9% increase year-over-year, while non-durable goods manufacturing faced a 0.4% drop in July, and a 1.6% decrease when compared to July 2022.
Since December, business equipment production has increased by 5.9%, translating to an annual growth rate of about 10%. This follows a notable 10.7% increase reported in 2022, measured from the fourth quarter of 2021 to the last quarter of 2022.
When it comes to information processing equipment—vital for developing artificial intelligence—production rose by 1.5% in July, up 8.9% from a year earlier. However, the growth stretches well beyond just tech-related products.
Industrial and other equipment, which makes up the largest portion of the Business Equipment Index, increased production by 1.4% last month. Also, the production of business equipment—excluding automobiles and parts—went up by 1.5%, and that segment saw a year-on-year rise of 5.2%.
Supply chains for capital goods also seem to be strengthening. Equipment parts production grew by 1.3% in July and was up 6.1% compared to last year. Moreover, production of construction materials increased by 0.8%, marking the largest rise since January.
Breaking it down by industry, the production of computers and electronic products climbed by 1.9% in July, a jump of 9.9% from the same month last year. Production in aerospace and other transportation equipment rose by 1.4%, electrical equipment by 1.3%, metal fabrication by 1.2%, and machinery production by 0.8%.
Despite this overall growth, the automotive sector faced challenges, with automobiles and parts being the main contributor to a 2.1% decrease in durable manufacturing during July, which was notable after three months of increases. Still, car production remained 2.1% higher compared to the previous year.
The variety of gains implies that the expansion in factories isn’t solely due to a rebound in AI-related production or automotive manufacturing. Durable goods production, even when disregarding specific high-tech sectors and cars, continued to progress in July, expanding at an annual rate of 3.7% during the second quarter.
In defense and space production—classified separately from business equipment by the Fed—an increase of 1.8% was recorded in July, translating to a 6.8% rise from a year prior, with an annual growth rate of 14.7% in the second quarter.
Capacity utilization shows a growing demand for capital goods as well. July saw machine shops operating at 82.9%, compared to a long-term average of 78.2%. Electrical equipment availability climbed to 86.8%, significantly above the historical average of 81.7%.
Overall, durable manufacturing capacity utilization improved to 76.2% from 73.4% at the end of last year, bringing it closer to the long-term average of 76.7%.
This capital goods strength contrasts sharply with ongoing weaknesses in consumer-oriented manufacturing. Output in July for consumer goods decreased by 0.4% and 1.8% compared to the same month in the previous year, with reductions noted in food, chemical, paper, and apparel sectors.
On a broader scale, overall manufacturing production expanded at an annualized rate of 5.2% in the second quarter, marking the fastest growth since 2021. June’s growth was also revised upwards to 0.3%, suggesting that the sector began the third quarter with more momentum than previously indicated.
