Hurricane Ida, supply constraints hold back U.S. factory production

* Manufacturing production increases 0.2% in August

* Industrial output rises 0.4%; Hurricane Ida hurts mining

* Import prices fall 0.3% in August; up 9.0% year-on-year

By Lucia Mutikani

WASHINGTON, Sept 15 (Reuters) - Production at U.S. factories slowed sharply in August as Hurricane Ida forced plant closures and an ongoing microchip shortage curbed motor vehicle output, but manufacturing remains strong amid lean inventories.

There was more goods news on the inflation front. Import prices declined for the first time in 10 months in August, other data showed on Wednesday. Persistent bottlenecks in the supply chain could, however, keep inflation high. Federal Reserve Chair Jerome Powell has maintained that high inflation is transitory.

"Growth in manufacturing going forward is likely to be supported by low inventories," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York. "But supply issues and shortages remain a constraint for now that are preventing a stronger rebound."

Manufacturing output increased 0.2% last month after surging 1.6%, the Fed said. The U.S. central bank estimated that Hurricane Ida, which devastated U.S. offshore energy production and knocked off power in Louisiana at the end of August, subtracted 0.2 percentage point from manufacturing output.

The hurricane led to plant closures for petrochemicals, plastic resins and petroleum refining. Economists polled by Reuters had forecast manufacturing production would gain 0.4%.

The drag from the closures was offset by strong gains in the output of computer and electronic goods as well as furniture and related products. But production of machinery fell as did that of electrical equipment, appliances and components, likely because of raw material shortages, especially semiconductors.

Output at auto plants edged up 0.1% after jumping 9.5% in July when automakers scrapped the traditional summer plant shutdowns for retooling as they adjusted their schedules to deal with the chip shortage. The raw materials crunch has been worsened by the latest wave of infections driven by the Delta variant of the coronavirus, primarily in Southeast Asia, as well as by congestion at ports in China.

Motor vehicle production could fall in September. General Motors Co GM.N said it would cut production at its plants in Indiana, Missouri and Tennessee this month because of the dearth of microchips. Ford Motor Co F.N is also reducing truck production. Excluding autos, manufacturing output rose 0.2% in August after accelerating 1.1% in July.

Factory production is 1.0% above its pre-pandemic level.

The rise in manufacturing output and a 3.3% rebound in utilities as unseasonably hot weather boosted demand for air-conditioning lifted industrial production by 0.4%. Industrial output increased 0.8% in July.

Mining production fell 0.6%, reflecting hurricane-induced disruptions to oil and gas extraction in the Gulf of Mexico.

Stocks on Wall Street rose. The dollar slipped against a basket of currencies. U.S. Treasury prices were mixed.


Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, edged up 0.1 percentage point to 76.7% in August. Overall capacity use for the industrial sector rose 0.2 percentage point to 76.4%. It is 3.2 percentage points below its 1972-2020 average.

Officials at the Fed 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.

Inflation appears to have peaked or is close to doing so.

A second report from the Labor Department showed import prices dropped 0.3% last month after increasing 0.4% in July. The first decrease since October 2020 lowered the year-on-year increase to 9.0% from 10.3% in July.

The report followed on the heels of news on Tuesday that consumer prices recorded their smallest gain in seven months in August.

Imported fuel prices tumbled 2.3% last month after increasing 3.0% in July. Petroleum prices dropped 2.4%, while the cost of imported food rose 0.6%.

Excluding fuel and food, import prices fell 0.2%. These so-called core import prices gained 0.1% in July. There were small gains in the prices of imported capital goods and consumer goods, excluding automobiles.

"Inflation took a little breather in August, but the race or marathon isn't over yet," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

A third report from the New York Fed showed its "Empire State" index on current business conditions surged to a reading of 34.3 this month from 18.3 in August. A reading above zero suggests an expansion in regional business activity.

Firms in the region were very optimistic that business conditions would improve over the next six months, with capital and technology spending plans increasing markedly.

But supply side challenges remained, with the delivery times measure hitting a record high.

While a measure of prices paid for inputs by firms in the regions slipped it remained at very high levels. Manufacturers reported raising prices for their goods, with the survey's gauge of prices received marking its third straight record high.

"Businesses and consumers are not out of the woods yet," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "Still, we remain comfortable with our forecast for inflationary pressures to moderate further, abstracting from the temporary hurricane effect in September."

Industrial production Link
Empire State Link
Inflation Link

Reporting By Lucia Mutikani; Editing by Andrea Ricci

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