US: Industrial Production

Fri Oct 16 08:15:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Production - M/M change -0.3% -0.6% to 0.3% -0.2% -0.4% -0.1%
Capacity Utilization Rate - Level 77.4% 77.2% to 77.9% 77.5% 77.6% 77.8%
Manufacturing - M/M -0.2% -0.4% to 0.5% -0.1% -0.5% -0.4%

Industrial production continues to sink, down 0.2 percent in September which is slightly better than the Econoday consensus for minus 0.3 percent. The manufacturing component continues to sink, down 0.1 percent for a second straight decline and the fourth decline in five months. Industrial production was revised sharply upward for August, from an initial decline of minus 0.4 percent to only minus 0.1 percent. But the improvement is due to sharp upward revisions to the utility and mining components, less so for manufacturing where the revised decrease now stands at minus 0.4 percent for only a 1 tenth improvement from the initial reading.

Motor vehicle production, which swung up and down through the summer, settled in with a 0.2 percent gain for September. Looking at the long-term trend, vehicle production is at the top of the report with a year-on-year gain of 9.4 percent in strength underscoring that demand right now is domestically based. Business equipment production, which is closely tied to exports, slipped 1 tenth in September for a year-on-year increase of only 1.8 percent. Consumer goods, which are centered for the domestic market, gained 0.2 percent for a year-on-year rate of plus 2.6 percent.

Overall capacity utilization slipped 3 tenths to 77.5 percent with manufacturing utilization down 2 tenths to 75.9 percent. Note that excess capacity in the manufacturing sector is a factor that is holding down the costs of goods.

Turning quickly to the other components, utility production, driven by September's unseasonable cooling needs, jumped 1.3 percent and also now 1.3 percent in August as well, up from an initial reading of plus 0.6 percent. Mining production, which has been pulled lower by commodity prices, fell 2.0 percent in the month with year-on-year contraction standing at minus 5.7 percent. Mining production in August is now revised to unchanged from an initial decline of minus 0.6 percent.

The industrial sector, specifically the manufacturing sector, continues to struggle, largely the result of weak exports. This report plays into the hands of the doves who can argue that the factory sector, also underscored by yesterday's contraction in the Empire State and Philly Fed reports, is facing serious risks going into the New Year.

Market Consensus Before Announcement
Industrial production is once again expected to prove weak, at minus 0.3 percent following September's decline of 0.4 percent. These readings would just about reverse July's 0.9 percent auto-related jump and point to limited contribution from the industrial sector for third-quarter GDP. The manufacturing component, based on hours in the employment report, is expected to fall 0.2 percent. Weakness in exports is behind much of the weakness in this report, though exports are not broken out in the data.

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.