U.S. factory output slipped in May, indicating a strong dollar. As a result, global economic weakness has started to take a toll on business.
On Monday, June 15, the Federal Reserve reported that industrial production dropped unexpectedly in May. Production decreased 0.2% month-over-month after falling 0.5% in April. (Source: the Federal Reserve, June 15, 2015.)
In the same report, the Fed’s industrial production figures show that auto production rose 1.7%; the third consecutive monthly improvement at auto plants is among the signs of a broader factory comeback. Mining and energy decreased by 0.3% in May, which marks the fifth straight monthly decline.
The Empire State Manufacturing Survey, an early reading on New York industrial activity, was also released on Monday. The index decreased five points to a reading of negative 2.0, indicating the manufacturing activity in the state declined in June. (Source: the Federal Reserve Bank of New York, June 15, 2015.)
The reports show American manufacturing continues to have difficulties as businesses struggle to cope with a strong dollar and spending cuts in the energy sector. The U.S. dollar has risen significantly against other major currencies over the last few months. The combination makes U.S. goods more expensive for foreigners and imports cheaper.
While many expect that the gross domestic product (GDP) will grow stronger than the first quarter, today’s report could also force economists to lower their expectations for the upcoming quarter. The overall U.S. economy shrank in the first quarter of 2015 and U.S. GDP declined at an annual rate of 0.7% in the first three months of 2015. (Source: Bureau of Economic Analysis, last accessed June 15, 2015.)
For investors, the question now is how this weak economic data will impact monetary policy in the coming week. The Federal Open Market Committee is scheduled to gather on June 16 and 17. Analysts had been anticipating the central bank to hike rates later this year, but the numbers published today could taper those expectations.