Despite a boost from exports, manufacturing output is declining due to falling domestic demand. Industrial production peaked last July and...

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Despite a boost from exports, manufacturing output is declining due to falling domestic demand.

Industrial production peaked last July and has lost 1.6 percent through May, notes High Frequency Economics’ Ian Shepherdson. “This does not compare to the 6.8 percent peak-to-trough drop recorded during the downturn in 2000-to-2001, but then again we very much doubt the floor has been reached in this cycle,” he writes.

The manufacturing sector, which supports 10 percent of the nation’s work force, has struggled due to the housing slump cutting residential construction and demand for appliances, furniture and carpeting, according to the Federal Reserve.

The automotive sector is also to blame. Ford Motor and General Motors have slashed production of large vehicles such as pickup trucks, which require more and bigger parts than small cars, says Global Insight economist Brian Bethune.

He notes the tax-stimulus checks are unlikely to result in more spending on big-ticket items because consumers are still putting off such purchases.

Bethune doesn’t see housing stabilizing until year-end and says commercial construction and demand for products like steel beams is weakening. He also expects several more years of production cuts in the U.S. auto industry.

The dollar’s multiyear decline is offsetting some of the pain for manufacturers, as U.S.-made goods are cheaper overseas.

For the full year, Bethune expects gross domestic product, or the output of all the nation’s goods and services, to rise 1.24 percent, but the lion’s share will stem from overseas demand. Yet domestic demand drives most of the nation’s economy; exports make up just 13 percent.

Two important precursors to the Institute for Supply Management’s manufacturing index, due Tuesday, posted declines for June. The regional readings from New York and Philadelphia suggest the broader institute will likely fall from its May level.