U.S. industrial production rose 0.5 percent in July -- its first increase since October 2008 -- the U.S. Federal Reserve announced Friday, boosted higher by a revived auto sector.

This was only the second increase in output since the recession started in December 2007. However, output is still down a staggering 13.1 percent in the past year. Excluding autos, industrial production fell 0.1 percent in July. Industrial production declined 0.4 percent in June and 1.2 percent in May.

Further, capacity utilization increased to 68.5 percent in July from a record-low of 68.1 percent in June. Economists surveyed by Bloomberg News had expected July industrial production to increase 0.6 percent and the utilization rate to rise to 68.5 percent.

Vehicle sector key to industrial output rise

In the July data, a 20.1 percent surge in vehicle production propelled the industrial gain, but it wasn't due to the just-implemented federal government "cash-for-clunkers" auto program, but rather to a planned production increase by automakers after large cutbacks. Most economists say auto production should increase as the U.S. recovery strengthens, because about 10 million U.S. cars wear-out per year and the nation is manufacturing only about 9.2 million cars a year. Still, the federal government's "clunkers" program should provide an additional tailwind for the auto sector, many economists agree. And the auto sector needs all the help it can get: vehicle production is still down a jaw-dropping 32 percent in the past 12 months.

Also in July, mining output rose 1 percent, high technology production increased 0.4 percent, and utilities output fell 2.4 percent, the latter largely due to the cooler-than-normal summer across much of the nation.

Investors should pay attention to industrial production and capacity utilization data because although manufacturing accounts for less than 20 percent of U.S. GDP, it accounts for most of the nation's cyclical growth. Continual declines in production point to a softening economy; rising production indicates the reverse. A low-capacity utilization rate usually reflects softer demand; a high rate, strong demand, with the potential for increased price pressure.

Economic Analysis:
While the report signals a recovery in the nation's factories, the U.S. stock market will likely express a muted reaction to the July data. The increase in July was expected, and one should keep in mind that the pronounced recession has reduced industrial output to such a degree, any increase in demand or impact of fiscal stimulus should lead to an industrial output rise. Further, the U.S. will need years of industrial production increases to get output -- and industrial jobs -- back to where they need to be to achieve expanding economic prosperity.


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