Factory Output Rises as Import Costs Climb
U.S. factory output recovered in September, but Friday’s new figures give us a measured reason for encouragement. The Federal Reserve reported a 0.3% monthly increase in manufacturing, following a revised 0.2% decline in August. Overall industrial production rose 0.7%, although a much larger increase in utilities helped lift that headline. For the Fly High universe, the useful question is whether stronger activity leaves businesses with more money after costs and interest.
There is some welcome breadth beneath the factory gain: machinery, primary metals, and electrical equipment, appliances and components each increased output by at least 1%. Yet motor vehicles and parts fell 3%, while business equipment production was unchanged. Manufacturing grew at just a 0.7% annual rate over the third quarter, so September’s improvement does not establish a strong, sustained industrial expansion.
Meanwhile, the Bureau of Labor Statistics reported that import prices excluding fuel rose 0.7% in September and 6% over the year. Imported capital goods, including machinery and computer equipment, became more expensive. Those figures describe import prices rather than every company’s costs, but they show why producing more and earning more can part company. Businesses buying imported equipment or materials may need higher selling prices, better productivity or additional sales simply to protect the profit they already earn.
For business development companies, which lend to private businesses, that balance matters through borrowers’ ability to pay interest. More factory activity can help an exposed borrower spread fixed expenses across additional production, although the benefit depends on selling that output profitably. If input costs absorb the improvement, the lender has less reason to expect stronger cash payments or fewer credit losses. This release measures neither loan repayments nor defaults, and it cannot establish that credit quality has improved.
Property income has a different connection because additional production supports an industrial landlord only when it translates into demand for space and rent that tenants can afford. It says little directly about mortgage lenders’ funding margins, and it does not turn a fund’s distribution into earnings coverage.
We welcome the manufacturing recovery, but the combination of modest quarterly growth and rising imported costs keeps our judgment restrained: this is a useful sign of activity, with dividend support still depending on the profits left behind. Broader production gains accompanied by firmer operating margins and steady cash interest payments would make the case materially stronger.
Sources
- Federal Reserve: September industrial production and capacity utilization, released October 16
- Bureau of Labor Statistics: September import and export prices, released October 16
This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.