Underwhelming Gain in Industrial Production

The 0.2 percent gain in January industrial production was just a shade weaker than expected, but December’s output figures were revised sharply lower. Weakness in autos and mining get most of the blame.

Plodding Gains in Production

Manufacturing output matched the gain for overall industrial production; up 0.2 percent. Compared to last year, factory production is up 5.6 percent. In terms of the underlying market groups, durables production was weak, particularly consumer durables. Appliances, furniture and carpeting fell 1.9 percent and as we discuss in detail below, automotive products production fell 1.5 percent. Some of the weakness is also attributable to the public sector, as defense and space equipment output fell 1.1 percent.

Elsewhere, business equipment spending was a bright spot in an otherwise disappointing report. Information processing equipment production increased 1.0 percent and industrial business equipment added 1.1 percent. A warm December followed by a cold January contributed to volatility in the demand for electricity and natural gas. After a 6.9 percent plunge in utility production in December, that sector retraced less than half of the prior month’s decline, rising 2.3 percent.

Mining output fell 1.0 percent as drilling activity slowed. Oil and gas well drilling fell 10.0 percent in January even as oil output continues to increase. According to weekly data from the U.S. Department of Energy, crude oil production was higher in January vs. December and rose to a record high in the first week of February.

Capacity utilization as a whole was revised down to 79.4 percent in December versus a previously reported 79.7 percent. The January figure was unchanged from December at 79.4 percent. Oddly enough, this comes as manufacturing capacity and utilities capacity both increased. The reason for the much lower utilization rate, and one explaining factor behind the downward revision, is the amount of equipment that is sitting idle at mining operations, where the utilization rate fell a full percentage point in January alone and three percentage points since its June high.

Automotive Sector Shows Room for Improvement

Motor vehicle assemblies fell another 0.6 percent in January, marking the fifth decline in the past six months. Given the deterioration in auto sales figures, the slowing in production makes sense. Total vehicle sales on the wholesale level slowed to an annualized rate of 16.6 million in January, a three month low. Retail sales of motor vehicles fell 0.5 percent in January, the second straight monthly decline.

One possible silver lining for the outlook for automobile production is the fact that lower gas prices are spurring increased interest in car buying on the part of an increasing number of consumers. The “good time to buy a vehicle” index from the University of Michigan’s consumer survey jumped 10 points in January. Gas prices rose in February, however, and the index gave back most of January’s gains