US: Industrial Production

Thu Feb 15 08:15:00 CST 2018

Consensus Consensus Range Actual Previous Revised
Production - M/M change 0.2% -0.3% to 0.5% -0.1% 0.9% 0.4%
Capacity Utilization Rate - Level 78.0% 77.7% to 78.2% 77.5% 77.9% 77.7%
Manufacturing - M/M 0.2% -0.1% to 0.3% 0.0% 0.1% 0.0%

Weakness in industrial production underscores what has been the Federal Reserve's very modest assessment of the factory sector. Industrial production fell 0.1 percent in January with December revised 5 tenths lower to a 0.4 percent gain which is offset in part by a 4 tenths upward revision to November which is now at plus 0.3 percent. The manufacturing component, that is the Federal Reserve's own measurement of goods volumes, is unchanged with both December and November revised 1 tenth lower to unchanged and up 0.2 percent.

The report's two smaller components are mixed. Utility production rose 0.6 percent in the month on top of December's 4.6 percent weather-related surge with the year-on-year rate at a very strong 10.8 percent. Mining, which had been strong, fell 1.0 percent in January with December revised sharply lower to minus 0.4 percent. On a yearly comparison, mining production is still very strong at an 8.8 percent gain.

But manufacturing production makes up the great bulk of this report and is up only 1.8 percent on the year in what is a far cry from the surging strength evident in small-sample regional reports such as this morning's Philly Fed and Empire State. This report, again in contrast to the anecdotal data, is not consistent with building inflation pressures, evident in capacity utilization which is down 2 tenths to 77.5 percent and a 1/2 point under expectations. For the FOMC, today's results do not turn up pressure for more hawkish policy.

Note that traditional non-NAICS numbers for industrial production may differ marginally from NAICS basis figures.

Market Consensus Before Announcement
The manufacturing component of this report has been an anomaly, showing a long trend of marginal growth against a full year of record readings in regional and private samples and now sharp acceleration underway for actual factory orders and shipments. And yet manufacturing hours were down in the January employment report and have forecasters calling for another weak month of production in this report, at a consensus January gain of only 0.2 percent following a 0.1 percent gain in December. The report's two other components, mining and utilities, have been mixed with the former showing strong growth but the latter up and down on weather-related demand. Taken all together, the consensus gain for January industrial production is, like that for manufacturing, 0.2 percent with total capacity utilization seen rising 1 tenth to 78.0 percent.

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 2012. The capacity index, which is an estimate of sustainable potential output, is also expressed as a percentage of actual output in 2012. 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 reconstruct 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.