April Industrial Production and Capacity Utilization

The country’s output of things physically produced or mined was flat for the month of April according to the Federal Reserve’s report on Industrial Production and Capacity Utilization.  This level output figure came after March’s growth figure was revised downward to 0.7 percent from 0.8 percent.  Year-over-year, this indicator is still up 5 percent, but the twelve month comparisons have been falling since December 2010.  Slipping to 76.9 percent from a downwardly revised 77.0 percent in the previous month, the proportion of our country’s capacity being used fell as well.

Industrial output is unlike other indicators because it does not measure price.  This indicator follows the actual volume of goods being made. The manufacturing component fell 0.4 percent as the number of cars and parts cascaded 8.9 percent which led durable goods to drop 1.0 percent.  Nondurable goods managed to increase 0.1 percent.  Utilities and Mining grew by 1.7 percent and 0.8 percent respectively.  Capacity utilization measures the amount of slack in the economy. Currently it is running 3.5 percentage points below its 1972-2010 average of 80.4 percent.  This implies the country’s physical output can increase without stoking inflation, but it will need demand before such escalation can be justified.

As mentioned earlier, the pace of the output has been moderating since the end of last year even as our long term capacity trend remains unreached.  This is significant since the production side of our economy is more cyclically sensitive than the service side.  This slowing growth rate is something the Atlas crew will be monitoring in the coming months as it may be hinting at the business cycle’s trajectory.