March industrial output signals improvement in supply

Summary

Activity in the industrial sector of the economy broadly improved in March. More recent disruptions, such as closures of key Chinese factories and the continued conflict in Ukraine, pose near-term headwinds to U.S. manufacturing, but today's report is the latest sign of incremental improvement in supply chains.

Production resilient in face of new supply disruptions

Industrial production rose 0.9% in March, more than double the gain expected by the consensus, while past data for February were also revised higher to show an equivalent 0.9% gain in output. Remarkably, this improvement in production comes amid new supply disruptions during the month with fresh lockdowns at key Chinese factories and the continued war in Ukraine.

The data signal incremental progress in manufacturing amid slowly improving supply as manufacturers were able to continue to chip away at backlogged orders last month. Manufacturing output rose 0.9% after a 1.2% gain in February. Production was led by a 7.8% surge in motor vehicles, reflecting some payback from the near 5% decline a month prior. Auto assemblies jumped 23% last month to 1.86 million, which marks the highest number of vehicles assembled in a single month since the start of 2021 (chart), a marked improvement in an industry that has been the poster-child of supply chain issues.

Elsewhere, rising output was fairly broad-based across the manufacturing sector (chart), with 14 of the 20 major industries reporting gains. The largest decline came from primary metals production (-1.7%), but encouragingly all categories that reported a decline in March posted sizable gains a month earlier (+1% or higher).

Utilities production inched modestly higher, up 0.4% in March, likely reflecting the fact that March was a bit warmer than average across most of the country. Mining output rose 1.7%, marking the sixth consecutive monthly increase and the highest gain in five months. The recent momentum here likely reflects increased drilling activity in the United States amid sanctions against Russian oil and gas.

Manufacturing activity in March clearly demonstrated progress in supply, but global supply chains still remain a far cry from functioning normally. As seen in our Pressure Gauge below, which broadly tracks high-frequency measures of supply chains, there has been some improvement in the pace of activity (slower gain in order backlog, quicker delivery times and declines in prices) but levels still remain way above pre-pandemic norms.

Production may again falter in the near-term amid disruptions as producers still have difficulty procuring inputs, but the past couple of months of data demonstrate notable progress. After two-years of headache for manufacturers, we take today's report as the latest positive sign for improvement in the productive sector of the economy.

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