Cooling auto sales have led to a drop in production at U.S. factories, constraining a key driver of economic growth in recent years.
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U.S. manufacturing production has fallen two of the last three months, including a 0.1% dip in July, the Federal Reserve said Thursday. The decline partly offset big gains in mining and utility production, which pushed overall U.S. industrial output -- a major indicator of the economy's health -- to rise 0.2% last month.
The biggest factor behind the factory sector's latest softness has been a sharp drop in manufacturing of new vehicles. Auto output has fallen three consecutive months and 4% over the year. Dealers have been placing fewer orders for sedans and other light vehicles at factories, as they try to whittle down inventories and slog through a monthslong decline in new-car sales.
New-vehicle sales reached a record 17.5 million in 2016 and are expected to exceed a healthy 16.5 million this year. Also, overall consumer spending at dealerships -- including on used cars and on services -- has been rising. But the industry's hot growth of recent years appears to have ended. New-vehicle sales have fallen for seven straight months, Autodata Corp. said earlier this month.
"We may have seen the peak" in car sales, Wells Fargo & Co. senior economist Tim Quinlan said. It isn't just a turn in the normal economic cycle, he said. He pointed to other factors, including vehicles that last longer on the road and the increasing popularity of ride-sharing services such as Uber and Lyft that reduce Americans' needs for their own cars.
Auto makers built 1.9% fewer vehicles during the first seven months of 2017 compared with the same period a year ago, according to WardsAuto.com, an automotive data and information provider. Industry output sharply declined in July as unsold inventory levels remain near record highs.
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The production declines affect factories making sedans and compact cars that are unpopular amid low gasoline prices. Sales of Toyota Motor Corp.'s Camry and General Motors Co.'s Chevy Malibu are struggling as buyers flock to pickups and sport-utility vehicles.
U.S. factories -- particularly those run by GM and Fiat Chrysler Automobiles NV -- traditionally made a disproportionate mix of the passenger cars compared with Mexico, leading to a hit for American auto workers being idled or laid off as the segments shift and the broader market softens. Output in the U.S. slipped 6% through the first seven months, reflecting the impact of plant shutdowns and model-year changeovers at several locations.
Mexican production, meanwhile, is skyrocketing as Detroit auto makers and others ramp up production of trucks south of the border. GM, for instance, builds its popular Silverado in the city of Silao, and Chrysler recently began building a popular Jeep in a retooled Mexican plant.
Michael Montgomery, economist at IHS Markit, said the auto sector's biggest problem is too many cars sitting on dealer lots. That is in part due to big swings that typically occur in the economic cycle of auto demand.
"When auto sales go bad, they go very bad," Mr. Montgomery said. "And when they come back they overshoot what they can sustain for the long term to the high side and then they soften back down to normal."
Yet the picture isn't all bleak. Other figures indicate consumer spending at car dealerships -- as measured by dollars rather than units -- continues to climb.
The Commerce Department said this week spending rose 1.2% in July from a month earlier and is up 4.5% this year compared with the first seven months in 2016.
The higher spending likely reflects several factors. Consumers continue to shift toward trucks and sport-utility vehicles, which are more expensive than sedans, as gasoline prices remain low. Also, more used cars are hitting the market as leases signed three years ago expire.
High auto demand gave a big boost to economic growth in recent years. Despite the industry's slowdown, economists are projecting the economy will pick up speed in coming months as consumers and businesses ramp up spending more broadly and exports benefit from a weak dollars. Many economists project U.S. gross domestic product -- the broadest measure of goods and services produced in the U.S.--to grow at an annualized rate of 3% or more in the third quarter, up from the second quarter's pace of 2.6%.
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(END) Dow Jones Newswires
August 17, 2017 16:22 ET (20:22 GMT)