US Industrial Output Drops In Sept As Supply Issues Plague Economy

Output by US industries fell sharply last month amid continued supply constraints hindering manufacturing, according to official data released Monday.

The rapid surge in demand for goods as the American economy reopened in the wake of the Covid-19 shutdowns has created severe challenges for suppliers who struggle to get key materials and goods.

Ports are backed up, transportation firms are struggling to find truck drivers to deliver product, and factories overseas, in some cases, still have not fully reopened.

Total industrial production fell 1.3 percent in September, according to the Federal Reserve data, a surprise drop as economists were forecasting a modest increase.

Declines were apparent across multiple categories but stark in the auto sector, with production of motor vehicles and parts falling 7.2 percent "as shortages of semiconductors continued to hobble operations," the central bank said.

Other data have shown consumer spending and confidence remains high, but retailers are struggling to get enough product ahead of the holiday shopping season.

"Overall, demand for goods remains strong... supportive of manufacturing output. But persistent supply issues and shortages remain a constraint for the sector," said Rubeela Farooqi of High Frequency Economics.

Faced with ongoing supply bottlenecks, factory output fell 0.7 percent last month after a 0.4 percent drop in August, according to the revised data.

Mining, including oil drilling, plunged 2.3 percent, while cooler weather contributed to the 3.6 percent drop in utilities output.

However, the report said some of the declines were due to the impact of Hurricane Ida, which caused flooding and destruction in parts of Louisiana and the northeastern United States.

"The lingering effects of Hurricane Ida more than accounted for the drop in mining in September; they also contributed 0.3 percentage point to the drop in manufacturing," the report said.

"Overall, about 0.6 percentage point of the drop in total industrial production resulted from the impact of the hurricane."

Total industrial output is 4.6 percent above September 2020, despite the declines in the last two months, but remains below the pre-pandemic level.

Industrial capacity in use declined sharply to 75.2 percent, a full point lower than in August.

Oren Klachkin of Oxford Economics said while the hurricane impact will fade, "supply-side constraints will be with us for some time" and could last beyond the middle of next year.

"Logistics difficulties are the worst chokepoint, and input shortages, hiring constraints and little spare domestic production capacity are making problems worse," he said.

A regional survey by the New York Federal Reserve Bank showed nearly 80 percent of service sector firms and 94 percent of manufacturers were facing supply issues, with a third or more saying the difficulties were "substantial."

The bottlenecks have pushed prices higher, raising fears inflation will take hold.

Shortages of building supplies also have driven up home prices, dampening sales, although construction firms remain confident given continued strong demand, according to a report from the National Association of Homebuilders.

"Builders are getting increasingly concerned about affordability hurdles ahead for most buyers," said NAHB Chief Economist Robert Dietz, noting they could get worse as US mortgage rates rise.

"Policymakers must focus on fixing the broken supply chain. This will spur more construction and help ease upward pressure on home prices," he said in a statement.