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US factory output slips in May: What is the good news in the numbers? (+video)

A slump in fossil fuel refining and drilling outweighed solid growth in auto production, leading to a total manufacturing decline of 0.2 percent in May.

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    U.S. factory production fell 0.2 in May, slowed by a decrease in energy output. Bloomberg’s Vonnie Quinn breaks down the numbers on “Market Makers.”
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U.S. factory output slipped in May, hurt by a decline in oil refining that overshadowed solid gains by automakers.

The Federal Reserve said Monday that manufacturing output declined 0.2 percent last month, as productivity has basically been flat since January. Manufacturing has been hurt by the stronger dollar, higher oil prices reducing equipment orders and activity at refiners, and previously by cold winter weather at the start of the year.

"Manufacturers will continue to struggle with the impact of the dollar's rise for some time yet," said Paul Ashworth, chief U.S. economist at Capital Economics.

Overall industrial production — which also includes utilities and mining — fell 0.2 percent in May. Mining activity that covers oil and natural gas drilling tumbled for the fifth straight month, while output at utilities increased slightly.

In the manufacturing category, fossil fuel refining and chemical production dropped last month, as did the food, beverage and tobacco sector. The declines reinforced the possibility of a prolonged slump as the Federal Reserve Bank of New York separately reported Monday that its Empire State manufacturing index fell to negative 2 in June. Any reading above zero indicates expansion.

The dollar has risen 18 percent against a basket of international currencies in the past year. That makes U.S. goods more expensive overseas and makes imports cheaper, hurting sales in the U.S. and internationally. This puts more of the pressure on consumer spending to boost economic growth.

In a sign of consumer strength, auto production rose 1.7 percent, according to the Fed's industrial production figures. The third consecutive monthly improvement at auto plants is among the signs of a broader factory comeback.

"We are not surprised by the sluggishness of manufacturing, and it does not change our view that the consumer will be at the forefront of the economy over the next year," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

More people are buying autos. Cars and trucks sold last month at an annual pace of 17.8 million — the fastest monthly rate since 2005, according to industry analyst Autodata Corp. The greater demand could keep assembly lines humming at auto plants.

Other reports indicate that an industrial resurgence could help propel stronger growth through the rest of 2015.

U.S. manufacturing growth improved in May for the first time in six months, according to the Institute for Supply Management, a trade group of purchasing managers. Its index of manufacturing activity rose to 52.8 last month from 51.5 in April. That's the highest reading since February. Any reading above 50 signals expansion.

Several economists see stronger growth in the second quarter of the year, after the economy shrank at annual pace of 0.7 percent during the first three months.

Private forecaster Macroeconomic Advisers says that economic growth is tracking at an annual rate of 2.5 percent in the second quarter. The Atlanta branch of the Federal Reserve estimates that growth is running at 1.9 percent in the second quarter.

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