US Manufacturing Output Tumbles as Factories Struggle With High Interest Rates

WASHINGTON (Reuters)—Production at U.S. factories fell more than expected in December and output in the prior month was weaker than previously thought, indicating that manufacturing was rapidly losing momentum as higher borrowing costs hurt demand for goods.

According to the Federal Reserve, manufacturing output decreased 1.3% in November. The Federal Reserve revised the November data lower to show that factories’ production fell 1.1% rather than 0.6% as previously reported. Reuters polled economists and predicted that factory production would drop 0.3%.

On a year-on, December output decreased 0.5%. It fell by 2.5% annually in the fourth quarter.

Higher interest rates are decreasing the demand for goods which are most often bought on credit. Manufacturing, which makes up 11.3% of the U.S. GDP, is also being affected by past appreciations and a weakening global demand. In addition, spending is shifting back towards services.

According to data from Institute for Supply Management, national manufacturing has been declining since November. According to Tuesday’s report by the New York Federal Reserve, manufacturing in New York State has plunged to levels not seen since May 2020.

Last year, the Fed raised its policy rate 425 basis points from close to zero to the 4.25% – 4.50% range. This is the highest level since late 2007. In December, the U.S. central banking projected an additional 75 basis point increase in borrowing costs by 2023.

Last month, auto plant production fell by 1.0%. Also, the production of machinery and wood products saw a significant decline.

Mining output dropped 0.9% after declining 1.2% in November. The country’s cold snap boosted heating demand and prompted a 3.8% increase in utility production.

This helped to offset some of weakness in mining and manufacturing, leading to a 0.7% decline in overall industrial production. In November, industrial output fell 0.6%. In the fourth quarter, it fell at 1.7%.

The manufacturing sector’s capacity utilization, which measures how well firms use their resources, declined 1.0 percentage points to 77.5% in Dec. It is 0.7 percentage points below its long-term average.

The industrial sector’s overall capacity utilization fell by 0.6 percentage point, to 78.8%. This is 0.8 percent below its average 1972-2021.

Officials at the U.S. central banks tend to use capacity use measures as indicators of how much they are able to borrow. “slack” remains in the economy—how far