U.S Economy: Chip shortages, Hurricane Ida Affecting Factory Output Despite Strong Demand

There are concerns that supply constraints are hampering economic growth Production in the U.S even as Reuters report that factories fell by the most in seven months in September as an ongoing global shortage of semiconductors depressed motor vehicle output.

Manufacturing production last month was weighed down by the lingering effects of Hurricane Ida, which also severely disrupted output at mines. The report from the Federal Reserve on Monday followed on the heels of data last week showing a solid rise in inflation in September. Though retail sales rose last month that reflected higher prices for motor vehicles.

“While the hurricane disruption and weather effects will fade, labor and product shortages are still worsening, which will continue to weigh on manufacturing output over the coming months and quarters,” said Michael Pearce, a senior U.S. economist at Capital Economics in New York.

Manufacturing output dropped 0.7% last month, the largest decline since February. Data for August was revised down to show production falling 0.4% instead of rising 0.2% as previously reported. It was only the second time since April 2020, when mandatory closures of nonessential businesses were enforced to slow the first wave of COVID-19 infections, that manufacturing output fell for two straight months.

Economists polled by Reuters had forecast manufacturing production edging up 0.1%. Output increased 4.8% compared to September 2020. Manufacturing, which accounts for 12% of the U.S. economy, remains underpinned by businesses desperate to replenish stocks after inventories were drawn down in the first half of the year amid strong demand for goods.

Spending shifted to goods from services over the course of the pandemic, straining supply chains. The rotation back to services, such as travel and dining out, has been slowed by a resurgence in coronavirus infections over the summer, driven by the Delta variant.

Production at auto plants tumbled 7.2% after dropping 3.2% in August as the global shortage of microchips is forcing automakers to cut production. There is also a shortage of workers at ports, which is causing congestion and holding up the delivery of raw materials.

Motor vehicle assembly dropped to an annualized rate of 7.78 million units, the lowest since April 2020, from a pace of 8.82 million units in August.

“Supply issues limiting production will likely continue to limit consumption of autos, with latest industry guidance suggesting shortages could last well into 2022,” said Veronica Clark, an economist at Citigroup in New York.

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