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Industrial production strong

January 18, 2010 | "Barron’s Econoday"

Industrial production was strong in December at the headline level but the detail showed some weakening within manufacturing. Basically, we got a weather report for December. Growth in industrial production in December posted a sizable 0.6 percent gain, after a healthy 0.6 percent boost in November. The December rise equaled the consensus forecast for a 0.6 percent surge. The manufacturing component, however, fell 0.1 percent after surging 0.9 percent in November. For the latest month, utilities output spiked 5.9 percent in December on atypically cold weather while mining output rose 0.2 percent.

Within manufacturing, durables edged up 0.1 percent while nondurables dipped 0.1 percent. Within durables, major components were mixed with the strongest gain a 2.3 percent in increase in machinery and the largest loss a 4.6 percent drop in nonmetallic metals. Motor vehicle production was down as assemblies of motor vehicles declined in December to 7.06 million units annualized from 7.20 million in November. But motor vehicle parts were up. The weakness in nondurables was widespread but followed a very strong November.

Resource utilization is still low in the industrial sector but rising. The overall capacity utilization rate rose to 72.0 percent from 71.5 percent in November and came in marginally above market expectations for 71.9 percent.

On a year-on-year basis, industrial production in December improved to minus 2.0 percent from down 4.9 percent the month before.

Markets should focus on the negative manufacturing component rather than the strong headline number. The headline boost appears to reflect nothing more than higher utility usage due to atypically cold weather. Even though the December number should be seen a disappointing in terms of a weak manufacturing component, it is not disconcerting given that it followed such a strong November.

The traditional non-NAICS numbers for industrial production may differ marginally from the NAICS basis figures.

Market Consensus Before Announcement
Industrial production in November ramped up 0.8 percent, following a no change figure for October. The manufacturing component was particularly strong, spiking 1.1 percent, following a 0.2 percent dip in October. Utilities output declined 1.8 percent in November while mining output rebounded 2.1 percent. The overall capacity utilization rate rose to 71.3 percent from 70.6 percent in October. Looking ahead, the earlier-released indicators are mixed. On the negative side, aggregate production hours in manufacturing fell 0.4 percent in December and the Empire State manufacturing index fell back to just barely above break even. On the positive side, the ISM manufacturing and Philly Fed indexes rose further in positive territory.


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