US industrial production rises 1.7% as factory output unexpectedly stalls

US industrial production rose 1.7% from a year earlier in May, the Federal Reserve said, but manufacturing output was unexpectedly flat month-over-month as gains in durable goods were offset by a pullback in nondurable manufacturing. Economists had forecast a 0.3% monthly increase in overall industrial production, but the actual 0.1% gain fell short of that estimate after a revised 0.9% jump in April.

"The flat reading suggests businesses front-loaded production in prior months to build inventory buffers against potential supply disruptions," said Sarah Miller, senior US economist at Oxford Economics. "The inventory cycle appears to be normalizing after an accelerated buildup in the spring."

The industrial production index reached 102.6% of its 2017 average. Mining output jumped 1.3% while utilities declined 0.4%. Within manufacturing, durable goods rose 0.8%, led by gains of more than 1% in wood products, nonmetallic mineral products, primary metals, and motor vehicles. Nondurable goods fell 0.9%, with declines across almost all categories. Production of consumer goods dropped 0.5%, with an 0.8% decline in nondurable consumer goods outweighing a 0.5% increase in durable consumer goods.

Capacity utilization edged up to 76.2%, remaining 3.2 percentage points below the long-run average from 1972 to 2025. That gap gives the Federal Reserve room to let the economy absorb additional demand without triggering supply-side inflation, potentially supporting a more patient approach to rate policy. The last time capacity utilization sat at similar levels relative to its long-run average was in the early stages of the post-pandemic recovery in 2021.

Treasury yields edged lower following the release, with the two-year note falling 3 basis points to 4.12%, as traders interpreted the soft manufacturing data as reducing pressure on the Fed to maintain a restrictive stance. "The data reinforces the narrative that the economy is cooling gradually rather than sharply, which is the soft-landing scenario markets have been pricing," said Thomas Chen, rates strategist at BNP Paribas.

AI Investment Provides a Structural Backstop

Despite the monthly softness, investment tied to artificial intelligence continues to support manufacturing activity, particularly in sectors tied to data center construction and semiconductor equipment. Production of business equipment rose 0.6% in May, led by a 1.9% jump in transit equipment. Construction supplies climbed 1.1%, reflecting ongoing demand for industrial and technology-related building projects. The materials index gained 0.3%.

The manufacturing operating rate held steady at 75.7%, a level 2.5 percentage points below its long-run average. Mining capacity utilization rose 1.2 percentage points to 86.5%, running 1.3 points above its historical norm — a sign that energy and resource extraction sectors are operating near full capacity. Utilities utilization fell to 70.6%, remaining substantially below its long-run average as milder weather weighed on electricity demand.

The combination of flat factory output and below-trend capacity utilization paints a picture of an industrial sector that is recovering but not overheating. For the Federal Reserve, the data provides little urgency to adjust policy, with the economy able to absorb additional demand without stoking price pressures. Markets will watch the next industrial production release in July for signs of whether the May pause was a temporary breather or the start of a broader slowdown. The Fed's next benchmark revision to the industrial production indexes, scheduled for autumn 2026, could alter the trajectory that the current monthly data initially paints.

This article is for informational purposes only and does not constitute investment advice.