Here’s another addition to the pile of issues the US economy has to face: factory output plunges. According to the economic reports submitted to the White House, industrial production fell on August by the largest amounts since 2009. There was a 1.2% drop in production, characterized by a 0.7% drop of manufacturing output. There was also a 4% drop in the production of auto parts. The report greatly contradicts the earlier word that the auto industry is back on its feet.
It must be remembered that an earlier report showed that the auto industry is back on track, following the increased demands on cars. But apparently, this new report suggests that factories produced fewer cars as well as other manufactured goods. The economic activity is not the only aspect to blame because the recent onslaught of Hurricane Isaac has also resulted to the shutting down of factories and plants along the Gulf Coast.
New Reports Contradict Earlier Publication
This recent report has caused the involved private and government to worry because it contradicts a report released just last week emphasizing the improvement of business inventories. It was the Commerce Department that submitted the earlier news. Based on the said news submitted, stockpile rose by about $1.6 trillion since 2009.
Companies boost their stockpiles when they are anticipating a rise in sales in the coming months. This, in turn, leads to more factory production. Hence, the faster the restocking, the faster the economic growth will be too.
Further, the earlier report says that the wholesale stockpiles held by retailers rose by about 27%. But this report blatantly contradicts with the statement released by retailers. According to them, retail sales only increased in August because of the back-to-school fever. Prior to and after that, the activity of retail sales continues to be flat.
The manufacturing output has been one of the key reasons why the US economy was able to rise from recession. But when consumer spending slowed, the manufacturing industry was the first to get affected. Following the law of supply and demand, production cannot exceed demand for the company to optimize the resources used. So when households tightened their belts and decided to save instead of spend, businesses shifted their investments elsewhere. They purchased fewer types of machinery, hires fewer employees and cut production costs.
In the process, the global competitiveness of US exports dramatically weakened.
Households Should Spend More
Consumer spending dictates the production of industries. Hence, if consumers remain to save instead of spend, the industry will be largely affected. So in order to encourage the consumers to spend more, banks release more loans. They also became a little more lenient in terms of the credit score; thereby making bad credit loans more accessible.
On top of the traditional institutions, third party lenders have also intensified their campaigns to attract more users. The already-easy-to-accomplish forms have been made easier with a complete disregard of the applicant’s credit score; granted that proof of employment has been submitted.
There is an impending rise in gas prices in the coming months. According to the Labor Department, the increase in gas prices has been the driving factor behind the increase of most consumer prices. Other than that, there is an expected rise in the price of food and energy and these would require more spending. However, there has been no increase in wages so the employed would most likely borrow money in order to make ends meet. Meanwhile, other employees prefer to reduce their spending in order to limit the amount that they borrow.
Despite the confusion the two opposing reports create, one thing remains certain: the US economy still has a long way to go before full recovery.