Slumping autos weigh on U.S. manufacturing output; inflation tame

Wed Jun 15, 2016 2:25pm EDT
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By Lucia Mutikani

WASHINGTON (Reuters) - U.S. manufacturing output unexpectedly fell in May as motor vehicles and parts production recorded its biggest drop in nearly 2-1/2 years, suggesting sustained weakness in the sector even as the overall economy appears to be gaining momentum.

Other data on Wednesday showed underlying producer prices were subdued last month amid weakness in costs for health services, indicating inflation could remain tame for a while.

Against the back drop of weak manufacturing, benign inflation and a recent sharp slowdown in employment gains, the Federal Reserve on Wednesday left interest rates unchanged. The U.S. central bank, however, signaled it still planned two rate hikes this year.

"The disappointing manufacturing output points to continued sluggishness in this segment of the economy and will likely remain a source of concern at the Fed," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Manufacturing output fell 0.4 percent last month after increasing by a downwardly revised 0.2 percent in April, the Fed said. Economists polled by Reuters had forecast manufacturing production unchanged in May after a previously reported 0.3 percent increase in April.

The drop in production pushed manufacturing capacity utilization, a measure of how fully firms are using their resources, to a more than two-year low.

Motor vehicle and parts production slumped 4.2 percent last month, the largest fall since January 2014. But economists said the drop was likely temporary, citing strong auto sales and well-managed motor vehicle inventories.

There were also declines in the output of machinery and wood products. Manufacturing, which accounts for 12 percent of the U.S. economy, is struggling with the lingering effects of a strong dollar and sluggish overseas demand.   Continued...

A man unloads vegetables at Grand Central Market in Los Angeles, California, March 9, 2015.  REUTERS/Lucy Nicholson