The Federal Reserve said Friday that that the manufacturing component of the index dropped 0.9 percent last month, reversing a 0.8 percent gain in December. Over the past 12 months, factory production has increased just 2.9 percent. Manufacturing of wood products, computers, electrical equipment, apparel and chemicals also fell in January.
The decline suggests a clear cooling at U.S. factories that could prompt a slower pace of growth this year compared to 2018. While job growth has been solid, other sectors of the economy are showing signs for caution. Consumers appeared to retreat in December as the Labor Department reported that retail sales fell.
Manufacturers were hit last month by the partial government shutdown as well as the persistent cost pressures from the tariffs that President Donald Trump imposed on China. Even though the Trump administration has suggested progress in trade talks with China, the industrial production report shows that American companies have taken a hit.
“Manufacturing is under real pressure from the slowdown in China and the trade war, and we expect output to drift down over the first half of the year, putting the sector into a mild recession,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “This won’t kill the rest of the economy, but it won’t look good, either.”
Still, some reports about factory activity have stayed positive. The Institute for Supply Management, an association of purchasing managers, said its manufacturing index improved to 56.6 in January, after dipping to 54.3 in December. Anything above 50 signals growth in manufacturing.
In the Fed’s industrial production report, utility output rose 0.4 percent as the winter caused more natural gas usage. Mining edged up 0.1 percent.
Overall industrial production is up 3.8 percent from a year ago.
The industrial sector used less of its capacity in January, as the capacity utilization rate fell to 78.2 from 78.8 in January. When manufacturers rely on less of their capacity, they have less need to invest in new equipment and facilities.