Economists Dismiss Boost in U.S. Industrial Production Report

Economists say the unexpected boost in the Fed's industrial production report doesn't change the overall trend in the economy, which is clearly on a downward slope. The report unexpectedly rose 0.2% in the month of July, against expectations that it would come in flat, while the previous month's gain was downwardly revised one-tenth to 0.4%.

Contributing to the unexpected increase were advances in vehicle production, which posted a 3.6% gain, and mining, which advanced by 0.9% for the second straight month. On the downside, utilities fell 1.9% in July, following the previous month's 2.3% increase, which was largely responsible for the headline gain in June.

Guy LeBas, fixed income strategist at Janney Montgomery Scott, said "autos drove the majority of the improvement" as motor vehicle production "spiked" 3.6%, contrary to expectations of a technical drop following June's 4.8% jump.

"Are the auto manufacturers on a suicidal inventory-boosting rampage? Let's hope not," he said, commenting that the advance makes no sense.

Economic Strategist Millan Mulraine from TD Securities said the report suggests the weak greenback continues to help out industrial and manufacturing activity. "However, with the ISM indices both hovering around the 50 level, it is somewhat clear that overall business activity in the U.S. may be stagnating - at best," he said.

Likewise, Sireen Hajj, associate at Calyon Cr�dit Agricole CIB, said, "Despite the increase in IP, the manufacturing sector continues to tread water."

Over the past 12 months, industrial production has declined by 0.1%.

Capacity utilization, which assesses current output as a percentage of maximum capability, thereby measuring the amount of slack in the economy, rose one-tenth to 79.9%.

Prior to the release, Meny Grauman, an economist at CIBC World Markets, said an upside surprise, which he called unlikely, would probably be considered a blip and would be ignored, adding that traders are more likely to question the report itself rather than their own knowledge of what's going on.

The boost in the industrial production report follows another unexpected improvement in the morning, as the NY Fed's Empire State manufacturing survey bounced into growth mode following three months of declines.

By Patrick McGee and edited by Megan Ainscow