US: Manufacturing output finally improves

After some middling numbers in recent months for the manufacturing sector, today’s report showed a 1.1% gain for industrial production that according to analysts at Wells Fargo, is an indication of the long-awaited convergence with the more upbeat survey data.

Key Quotes:

“After a few lackluster months, manufacturing production picked up in earnest in February with a 1.2 percent monthly increase. All major categories were higher as well, with a notable 3.9 percent pop in motor vehicle and parts production. Even the sub-categories were broadly in positive territory, with only electrical equipment and petroleum & coal products posting declines on the month. By market group, every major category improved in February.”

“In recent months, there has been a split between hard and soft data, with most of the purchasing manager surveys and small business confidence measures at or near cycle highs, while actual output measures have been flat or slightly down. Our mantra throughout this period is that we would eventually see convergence in the data, so today’s better-than-expected outturn for manufacturing production is a step in the right direction.”

“In the current economic cycle, overall capacity utilization peaked in November 2014 at 79.2 percent. Most of the improvement in the build-up to that cycle high came from the mining sector, as high oil and commodity prices at the time led to capacity constraints, and later, when prices fell, led to freed-up capacity. The more recent improvement is partly attributable to rising utilization at the county’s mines, but it is also reflecting some tightening in the factories as well. Manufacturing capacity utilization hit a fresh cycle-high in February of 76.9 percent. That is still below the prior cycle high, but a bit above the 20-year average of 75.5 percent. It is still a bit early to worry about CPI inflation pressure from the manufacturing sector, but it is consistent with the comments about pricing that we have noted in recent ISM reports.”

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