Industrial Production Missed Expectations in January

Friday morning, shortly before the opening bell, the Federal Reserve announced that industrial production decreased 0.6% in January, following a 0.1% advance in December (revised down from +0.3% previously reported). The reading missed expectations of a 0.1% monthly advance. Meanwhile, capacity utilization came in at 78.2%, slightly below expectations of 78.7%. Total industrial production is up 3.8% from the same time last year, while total capacity utilization increased 2.2% annually.

Although industrial production accounts for a relatively small portion of total GDP, it is considered an important macroeconomic indicator as it measures output from the manufacturing, mining, electric and gas industries, and can aid in forecasting structural changes in the economy, business cycle inflection points, and inflationary trends.

In combination with capacity utilization readings, industrial production can be used as a gauge for future inflation as signs of inflation will begin to show at the industrial level via increases in the prices of commodities, basic materials and other input prices before trickling through the supply chain and ultimately resulting in higher costs for finished goods. This also makes it a good read for central banks such as the Federal Reserve when considering whether to raise short-term interest rates - and, as a result, it is important for us to monitor. Rate hike expectations can drive the entire market, especially the financial sector, as they directly impact bank earnings.

Digging deeper, manufacturing output - the largest component of industrial production and roughly 12% of GDP - fell 0.9% in January, coming on the heels of a 0.8% increase in December, which was downwardly revised from up 1.1% previously reported. Working to partially offset the manufacturing decline, mining production increased 0.1% in the month, following a 1.5% gain in December, while Utilities (electric and gas) output advanced 0.4%, following a 6.9% decline in December. With this, manufacturing production is up 2.9% from the same time last year while mining production is up 15.3%. Utilities output on the other hand is down 5.6% from the same time last year.

Breaking down the manufacturing industry one step further, durable manufacturing output fell 1.7%, while non-durable manufacturing output was unchanged and other manufacturing (publishing and lodging) ticked up 0.5%.

As for capacity utilization, on a monthly basis, we saw a 0.7 percentage point decrease in manufacturing to 75.8% in January. Additionally, we saw a 0.5 percentage point decline in mining to 94.8%. However, marginally offsetting the declines, utilities capacity utilization ticked up 0.2 percentage point to 75.4% in January. Annually, capacity growth has increased 1.4% in manufacturing, 6.2% in mining and 2.0% in utilities.

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