The recovery of US manufacturing suddenly hit the brakes: August output unexpectedly fell 0.3%, and capacity utilization fell to a five-month low.

U.S. factory output unexpectedly declined for the first time this year, affected by a slowdown in production at factories and higher input costs faced by manufacturing companies.

Data released by the Federal Reserve on Friday showed that manufacturing output fell 0.3% in August, while the median forecast in a survey of economists was for a 0.3% increase. Factory capacity utilization fell to 75.7%, a five-month low.

Total industrial output, including mining and utilities, remained stagnant. Utilities output rose 1.8% due to a rebound in electricity demand, while mining output saw a slight increase.

Within specific sectors, output value declined last month in computer and electronic products, furniture, and common metals; while it increased in machinery, clothing, and textiles. Automobile production fell 1.2% from the previous month. Excluding motor vehicles, manufacturing output value declined 0.2%.

Rising raw material costs and supply chain disruptions pose downside risks to the manufacturing sector.

The slowdown in manufacturing output in August marks a pause in the manufacturing recovery this year, which was driven by robust capital spending and strong consumer demand.

Producers are currently facing rising costs of oil and other raw materials, as well as supply chain disruptions caused by the wars in the Middle East and Ukraine. A report by Morgan Stanley's Michael Gapen team noted:

“We have been warning that rising energy prices and geopolitical risks pose downside risks to the manufacturing sector, and the August industrial production report may be an initial sign that these risks are beginning to emerge.”

The Federal Reserve report showed that after strong growth in the previous months, output of business equipment fell by 0.5%, and output of defense and aerospace equipment fell by 1.2%. Output of building materials, as well as consumer electronics and information processing equipment, also declined.

Nevertheless, the output value of enterprise equipment and defense and aerospace equipment still maintained significant growth compared to the same period last year. Bloomberg economist Andrew Sacher noted:

“A single month’s weakness is not enough to reverse the AI-driven investment growth trend. But the broad decline in durable goods production contradicts other recent reports. If this trend continues, the Fed may eventually find itself tightening monetary policy just as a key driver of economic growth begins to wane.”

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