US: Industrial Production

Fri Jan 16 08:15:00 CST 2015

Consensus Consensus Range Actual Previous Revised
Production - M/M change -0.1% -1.5% to 0.3% -0.1% 1.3%
Capacity Utilization Rate - Level 80.0% 78.6% to 97.8% 79.7% 80.1% 80.0%
Manufacturing - M/M 0.2% -0.5% to 0.3% 0.3% 1.1% 1.3%

The manufacturing sector is notably better than the headline number for December industrial production due to a drop in utilities. Industrial production for December slipped 0.1 percent, following a jump of 1.3 percent in November (original estimate of up 1.3 percent). Analysts expected a 0.1 percent dip on a reversal of November's surge in utilities.

Manufacturing, however, gained 0.3 percent following a surge of 1.3 percent in November. The median forecast for the manufacturing component was for an increase of 0.2 percent. Mining rebounded a healthy 2.2 percent, following a 0.3 percent decrease the month before. Utilities dropped a sharp 7.3 percent after a jump of 4.2 percent in November.

The production of durable goods increased 0.2 percent in December, and the production of nondurable goods rose 0.4 percent. Among major durable goods industries, primary metals posted the largest increase, 2.2 percent, while computers and electronic products registered a gain of 1.2 percent. The largest declines, of nearly 1 percent or more, were recorded by wood products and by motor vehicles and parts. Production increased for most nondurable goods industries, with the largest advance recorded by apparel and leather; only the plastics and rubber products industry registered a decrease. The production index for other manufacturing industries (publishing and logging) declined 0.3 percent.

Overall capacity utilization eased to 79.7 percent in December from 80.0 percent in November.

After discounting the heavily volatile utilities component, manufacturing continues recent improvement. Combined with a moderately positive consumer sector, economic growth is looking somewhat favorable. Looking ahead, the latest regional manufacturing surveys for January were mixed with Empire State accelerating and Philly Fed slowing.

Market Consensus Before Announcement
Industrial production for November jumped 1.3 percent after edging up 0.1 percent in October. Manufacturing surged 1.1 percent, following a gain of 0.4 percent in October. The rise in factory output was well above its average monthly pace of 0.3 percent over the previous five months and was its largest gain since February. Mining slipped 0.1 percent in October, following a 1.0 percent drop the month before. Utilities rebounded 5.1 percent after a 0.7 percent decline in October. Overall capacity utilization advanced to 80.1 percent in November from 79.3 percent in October. December's manufacturing component likely is to be moderate. Production worker hours in manufacturing were up 0.3 for the month.

The Federal Reserve's monthly index of industrial production and the related capacity indexes and capacity utilization rates cover manufacturing, mining, and electric and gas utilities. The industrial sector, together with construction, accounts for the bulk of the variation in national output over the course of the business cycle. The production index measures real output and is expressed as a percentage of real output in a base year, currently 2007. The capacity index, which is an estimate of sustainable potential output, is also expressed as a percentage of actual output in 2007. The rate of capacity utilization equals the seasonally adjusted output index expressed as a percentage of the related capacity index.

The index of industrial production is available nationally by market and industry groupings. The major groupings are comprised of final products (such as consumer goods, business equipment and construction supplies), intermediate products and materials. The industry groupings are manufacturing (further subdivided into durable and nondurable goods), mining and utilities. The capacity utilization rate -- reflecting the resource utilization of the nation's output facilities -- is available for the same market and industry groupings.

Industrial production was also revised to NAICS (North American Industry Classification System) in the early 2000s. Unlike other economic series that lost much historical data prior to 1992, the Federal Reserve Board was able to reconstruction historical data that go back more than 30 years.

Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more subdued growth that won't lead to inflationary pressures. By tracking economic data such as industrial production, investors will know what the economic backdrop is for these markets and their portfolios.

The index of industrial production shows how much factories, mines and utilities are producing. The manufacturing sector accounts for less than 20 percent of the economy, but most of its cyclical variation. Consequently, this report has a big influence on market behavior. In any given month, one can see whether capital goods or consumer goods are growing more rapidly. Are manufacturers still producing construction supplies and other materials? This detailed report shows which sectors of the economy are growing and which are not.

The capacity utilization rate provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (above 85 percent), it can lead to inflationary bottlenecks in production. The Federal Reserve watches this report closely and sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures. As such, the bond market can be highly sensitive to changes in the capacity utilization rate. In this global environment, though, global capacity constraints may matter as much as domestic capacity constraints.

Industrial production and capacity utilization indicate not only trends in the manufacturing sector, but also whether resource utilization is strained enough to forebode inflation. Also, industrial production is an important measure of current output for the economy and helps to define turning points in the business cycle (start of recession and start of recovery).

The bond market will rally with slower production and a lower utilization rate. Bond prices will fall when production is robust and the capacity utilization rate suggests supply bottlenecks. Healthy production growth is bullish for the stock market only if it isn't accompanied by indications of inflationary pressures.

The production of services may have gained prominence in the United States, but the production of manufactured goods remains a key to the economic business cycle. A nation's strength is judged by its ability to produce domestically those goods demanded by its residents as well as by importers. Many services are necessities of daily life and would be purchased whether economic conditions were weak or strong. Consumer durable goods and capital equipment are more likely purchased when the economy is robust. Production of manufactured goods causes volatility in the economy. When demand for manufactured goods decreases, it leads to less production with corresponding declines in employment and income.

The three most significant sectors include motor vehicles and parts, aircraft and information technology. Volatility in any these single sectors could affect the total.

Industrial production is subject to some monthly variation. As with all economic statistics, the three-month moving average of the monthly changes or year over year percent changes provide a clearer picture of the trend in this series.