Ford Explorer
M. Spencer Green/APA Ford Motor employee works on the engine assembly of a 2016 Ford Explorer at the Chicago Assembly Plant in Chicago.

WASHINGTON — U.S. industrial production unexpectedly fell in May as manufacturing and mining activity remained weak, a sign that a strong dollar and spending cuts in the energy sector continued to constrain economic growth.

The softness in the production side of the economy contrasts starkly with recent upbeat data on retail sales, employment, and small business and consumer confidence, which have pointed to a growth pickup after a sluggish start to the second quarter.

Signs of spring remain largely absent in the industrial sector. The challenges of the stronger dollar and drop in energy prices linger.

“Signs of spring remain largely absent in the industrial sector. The challenges of the stronger dollar and drop in energy prices linger,” said Tim Quinlan, an economist at Wells Fargo Securities in Charlotte, North Carolina.

Industrial output slipped 0.2 percent last month after declining 0.5 percent in April, the Federal Reserve said Monday. Industrial production has been weak since December, and economists had expected output to rise 0.2 percent last month.

The data was likely to get the attention of Fed policymakers who meet Tuesday and Wednesday, economists said.

The U.S. central bank isn’t expected to raise interest rates at this week’s policy meeting, but rather to wait until later this year.

Industrial production last month was held down by a 0.2 percent drop in manufacturing output. Manufacturing has been whacked by a strong dollar, which has eroded the profits of multinational corporations.

Companies like Microsoft (MSFT) and Procter & Gamble (PG), the world’s largest household products maker, and healthcare conglomerate Johnson & Johnson (JNJ) have warned the dollar will hit sales and profits this year.

The dollar has gained about 13.2 percent against the currencies of the United States’ main trading partners since last June largely on expectations of tighter U.S. monetary policy.

U.S. financial markets were little moved by Monday’s data as investors kept a wary eye on Greece, which inched closer to defaulting on its debt. U.S. stocks were trading lower, while the dollar slipped against a basket of currencies. Prices for U.S. government debt rose.

Weak Orders

Although motor vehicle production, machinery, and computer and electronic products increased last month, it was not enough to offset the drag on manufacturing output from declines in the production of electrical equipment, appliances and components, fabricated metal products and wood products.

Manufacturing, which accounts for 12 percent of the U.S. economy and more than 72 percent of industrial production, was also weighed down by falling output of nondurable goods such as food and petroleum products.

It is likely to remain weak in the months ahead.

In a separate report, the New York Fed said its Empire State general business conditions index dropped to a reading of minus 1.98 in June from 3.09 in May.

That was the weakest reading since January 2013 and the second negative reading in the past three months. A gauge of new orders contracted, while shipments edged down. Though a measure of unfilled orders increased last month, it remained in contraction territory, indicating order books remained weak.

“Manufacturers will continue to struggle with the impact of the dollar’s rise for some time yet,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

But given manufacturing’s small share of the economy and recent signs of a sharp pickup in growth in the non-factory sectors, Ashworth said “there is every reason to believe that GDP growth will average between 2.5 percent to 3 percent annualized over the rest of this year.”

That upbeat assessment was bolstered by a third report showing confidence among homebuilders vaulted to an eight-month high in June, suggesting the housing market recovery was gaining traction. Housing is expected to take up some of the slack from weak manufacturing.

GDP contracted in the first quarter, slammed by bad weather, port disruptions, dollar strength and energy sector spending cuts.

Last month, mining production fell 0.3 percent, the fifth straight monthly decline, as oil and gas well drilling and servicing fell 7.9 percent after plunging 14.5 percent in April.

That took the cumulative drop since the end of 2014 to 51.8 percent. But the pace of decline in oil and gas well drilling and servicing is moderating, suggesting the worst of the spending cuts is over.

Companies like Schlumberger (SLM), the world’s No. 1 oilfield services provider, and Halliburton (HAL) have slashed their capital spending budgets for this year.

Oil and gas production, however, increased 0.5 percent in May. Unseasonably warm weather last month lifted demand for air conditioning, leading to a 0.2 percent increase in utilities production.

The amount of industrial capacity in use last month fell to its lowest level since January 2014.

The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It’s important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
1. Gross Domestic Product

The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
2. Consumer Price Index

The unemployment rate measures the percentage of workers within the total labor force who don’t have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It’s therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
3. Unemployment Rate

The trade deficit measures the difference between the value of a nation’s imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation’s dependence on foreign countries.
4. Trade Deficit

Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there’s a reason we’ve combined them on one slide: In addition to being useful statistics separately for gauging Americans’ earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
5 & 6. Personal Income and Personal Spending

Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy’s prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
7. Consumer Confidence

The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
8. Housing Prices

Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board’s Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
9. Leading Economic Index

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