U.S. manufacturing output posts largest drop since 1946

© Reuters. FILE PHOTO: Line workers spot weld parts of the frame on the flex line at Nissan Motor Co's automobile manufacturing plant in Smyrna Tennessee

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. manufacturing output dropped by the most in just over 74 years in March as the novel coronavirus pandemic fractured supply chains, suggesting business investment contracted further in the first quarter.

The Federal Reserve said on Wednesday manufacturing production plummeted 6.3% last month, the biggest decrease since February 1946. Data for February was revised down to show output at factories slipping 0.1% instead of edging up 0.1% as previously reported. Economists polled by Reuters had forecast manufacturing output dropping 3.2% in March.

The Fed said "the estimates in this release incorporated data on stay-at-home orders as well as other information on

industrial activity for late in the month."

Production at factories dropped at a 7.1% annualized rate in the first quarter, the sharpest since the first quarter of 2009, after decreasing at a 0.5% pace in the October-December period. Manufacturing, which accounts for 11% of the U.S. economy, was already struggling from the fallout of the Trump administration's trade war with China well before the before the coronavirus hit U.S. shores.

In addition to disrupting global supply chains, the highly contagious virus, which causes a respiratory illness called COVID-19, has depressed demand for crude oil, undercutting spending by oil producers on drilling and shaft exploration equipment. Business investment has contracted for three straight quarters, the longest such stretch since the Great Recession. That downturn appears to have deepened in the first quarter.

Motor vehicles and parts production tumbled 28.0% last month. Business equipment output decreased 8.6%, held down by a 22.8% drop in transit equipment that reflected cutbacks in the output of both motor vehicles and civilian aircraft.

Production of construction supplies fell 5.8%, while business supplies output declined 6.7%. Oil and gas well drilling fell 1.3% last month.

The slump in manufacturing output in March, together with a 2.0% decline in mining and a 3.9% slump in utilities production, resulted in industrial production decreasing 5.4% last month. That was the largest decline in industrial output since January 1946 and followed a 0.5% gain in February. Industrial production contracted at a 7.5% rate in the first quarter, the steepest since the second quarter of 2009, after rising at 0.3% pace in the fourth quarter.

Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, fell 4.7 percentage points to 70.3% in March. Overall capacity use for the industrial sector decreased 4.3 percentage points to 72.7% in March. It is 7.1 percentage points below its 1972-2019 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.