Industrial Production Disappoints in January

Industrial production fell 0.1 percent in January despite expectations for a 0.2 percent gain. Also disappointing was the fact that last month’s gain was more than halved through downward revisions.

Mining Mostly to Blame…

Output at the nation’s mines slipped 1.0 percent in January, which weighed on overall output in the month. Mining only comprises a roughly 13 percent share of overall industrial production, but in a month like January when manufacturing output (which comprises roughly three quarters of the overall number) is flat, the marginal impact from a category like mining can mean the difference between a rise or fall in the headline number. What is particularly vexing here is that mining output was initially reported to have risen in the prior month by 1.6 percent, but that was revised today to an outright decline of 0.4 percent. Not to dwell too much on the past, but November was also revised, although the direction was higher. There was no immediate explanation in today’s release and these changes were not part of the annual revisions (that is coming up in March). Our best guess in the absence of a formal communication from the Fed is that this has to do with measurement issues around the hurricanes this fall, which may have temporarily boosted output in the immediate wake of the storms followed by a “payback” in the form of softer numbers in subsequent months.

…but Manufacturing Should Be Driving the Index

All the discussion about mining notwithstanding, manufacturing output was unchanged for the second straight month. Here too, hurricane-related adjustments may be partly to blame, as petroleum and chemical production are still not back to their summer levels. However, by any reckoning, we should be past that volatility now and seeing stronger factory output given the euphoric levels of activity being reported in various surveys of the manufacturing sector. For example, the production component of the ISM index has been above 60 for eight consecutive months and has even moved higher on trend more recently. This simply does not jive with flat manufacturing production in back-to-back months. We expect to see some convergence between the hard and soft data. In January, we upped our forecast for equipment spending in 2018, and as momentum builds in the manufacturing sector we expect to see a faster pace of expansion.

These Streets Will Make you Feel Brand New

Despite the only modest increase in manufacturing production reported for January, there is evidence that the resurgence in the factory sector has legs. That goes beyond just the ISM. Just this morning, for example, in separate regional Fed purchasing manager surveys, we learned that manufacturing activity in both the New York and Philadelphia areas remain in expansion territory in February. In both areas, respondents reported a faster pace of expansion in orders. This is consistent with our own anecdotal discussions with manufacturers at meetings and conferences around the country. Manufacturing output is poised for growth in coming months

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