By Lucia Mutikani
WASHINGTON (Reuters) - U.S. industrial production increased in June, boosted by a sharp rebound in manufacturing and further gains in mining output, the latest sign of robust economic growth in the second quarter.
But the outlook for the industrial sector is uncertain against the backdrop of escalating trade tensions between the United States and its major trade partners, which threaten to disrupt global trade. A strong dollar and shortage of workers also pose a risk to production, with factory surveys suggesting some strain in the supply chain.
"Time will tell if this disruption in foreign trade will slow the overall U.S. economy because manufacturers cannot get what they need to produce goods here for domestic consumption and for exports," said Chris Rupkey, chief economist at MUFG in New York.
The Federal Reserve said on Tuesday industrial production rose 0.6 percent last month after falling 0.5 percent in May. It
accelerated at a 6.0 percent annualized rate in the second quarter after a 2.4 percent growth pace in the first quarter.
Manufacturing output surged 0.8 percent in June after decreasing 1.0 percent in May. A 7.8 percent jump in motor vehicle production buoyed manufacturing output last month. Motor vehicle production declined 8.6 percent in May after a fire at a parts supplier caused a sharp drop in the assembly of trucks.
Excluding motor vehicles, manufacturing production rose 0.3 percent in June. Manufacturing, which accounts for about 12 percent of the economy, is being supported by a strong domestic and global economy. The data came on the heels of a report on Monday showing retail sales not only rose solidly in June, but were much stronger than previously reported in May.
Strong industrial production and retail sales, together with smaller trade deficits in April and June suggest economic growth accelerated sharply in the second quarter.
Gross domestic product estimates for the April-June quarter are as high as a 5.3 percent rate, more than double the first quarter's 2 percent pace.
The dollar was trading higher against a basket of currencies. Stocks on Wall Street rose as did prices for U.S. Treasuries.
EYES ON TARIFFS
Fed Chairman Jerome Powell struck an upbeat note on the economy when he appeared before lawmakers on Tuesday, saying it was on the cusp of "several years" of strong jobs and low inflation. Powell, however, said "it is difficult to predict the ultimate outcome of current discussions over trade policy."
The International Monetary Fund warned on Monday that tit-for-tat import tariffs threatened to derail the global economic recovery, adding that the U.S. was especially vulnerable to a slowdown in its exports.
Economists said the Trump's administration's protectionist trade policy and retaliation by other countries could undercut business spending. The tariffs are also seen raising prices for consumers, which could slow domestic demand. A strong dollar, which has gained about 4 percent versus the currencies of the United States' main trade partners, could hurt exports.
"Tariff uncertainty could cause businesses to cut capital expenditures and production," said Stephen Ciccarella, a senior economist at Moody's Analytics in West Chester, Pennsylvania.
Manufacturing output increased at a 1.9 percent rate in the second quarter after growing at a 1.7 percent pace in first quarter. In June, there was an increase in the production of wood, computer and electronic products as well as aerospace and miscellaneous transportation equipment.
Mining production increased 1.2 percent, adding to the 2.2 percent rise in May. Mining output is now at a record high.
Oil and gas well drilling rose 2.9 percent in June, with further gains likely following recent increases in oil prices. Mining output accelerated at a 19.4 percent rate in the second quarter after notching a 11.0 percent pace in the first quarter.
Utilities output fell 1.5 percent in June, despite a heat-wave which engulfed parts of the country, after declining 0.7 percent in May.
With production increasing solidly last month, capacity utilization, a measure of how fully firms are using their resources, increased to 78.0 percent from 77.7 percent in May. It is 1.8 percentage points below its 1972-to-2017 average.
Officials at the Fed tend to look at capacity use measures for signals of how much "slack" remains in the economy — how far growth has room to run before it becomes inflationary.