WASHINGTON—U.S. industrial production declined in October as the continuing slump in crude oil prices weighed on oil drilling and milder-than-usual weather tamped down electricity use.
However manufacturing output, which accounts for almost three-quarters of overall industrial production, posted its strongest growth since July, buoyed by gains in automobiles, parts and construction supplies.
Industrial production—a broad measure of everything made by American factories, mines and utilities—fell a seasonally adjusted 0.2% in October from a month earlier, the Federal Reserve said Tuesday. That followed a 0.2% decline in September.
Capacity utilization, which measures slack across industrial firms, fell in October to 77.5% from September’s revised reading of 77.7%. Before the 2007-2009 recession, capacity use typically hovered above 80%.
Economists surveyed by The Wall Street Journal had anticipated industrial production would be flat in October, and the utilization rate at 77.5%.
Manufacturing output grew 0.4% after dropping 0.1% in September, although the growth wasn’t strong enough to offset the effects of the sharp decline in oil prices since mid-2014 that has caused energy companies to scale back drilling. That contributed to a 1.5% drop last month in mining output. Utilities fell 2.5%, driven by a decline in output from electric utilities which economists attributed to unusually warm weather.
“Despite the disappointing headline performance, which was due to the unseasonably warm fall, the healthy rise in manufacturing sector production could be a welcome sign that the headwinds to this sector (coming from the strong dollar and weak global demand) are beginning to ease,” said Millan Mulraine of TD Securities.
Overall industrial output in October was up a modest 0.3% from a year earlier. The sector remains under pressure from weaker global demand and from the stronger U.S. dollar, which makes exports more expensive. PNC economist Gus Faucher warned the downturn in investment in energy production will continue to weigh on manufacturing next year as firms cut back mining output due to lower commodity prices.
However Chris Rupkey of the Bank of Tokyo-Mitsubishi described the recovery in factory production as a positive signal for Federal Reserve officials ahead of a policy meeting next month that may result in their first interest-rate increase since 2006. He said “the last headwind to the Fed lifting off in December falls to the wayside” in a note to clients.
The tightening of U.S. monetary policy—and the strengthening of the dollar that would be expected to follow—is likely to come as central banks in Europe and Asia extend their easy-money policies. That could put U.S. factories at a greater disadvantage against foreign rivals.
The U.S. economy has broadcast mixed signals about its health in the year to date. Hiring has been steady, many housing markets have been strengthening, and low gasoline prices have put a few extra dollars in American consumers’ wallets. But wage growth and consumer spending have yet to show sustained improvement, and the economic turmoil around the world has raised concerns about where overall demand from businesses and consumers is heading.