Industrial Production

After stagnating in February, the Federal Reserve’s measure of industrial production put in its second consecutive month of no growth in March.  Nonetheless, America’s physical production improved at an annualized rate of 5.4 percent, and its year-over-year increase was 3.8 percent in the first quarter.

Underneath the headline figures, we see a split in the performance of the different components of industrial production.  Manufacturing contracted 0.2 percent for the month but still had a decent quarter in which auto making surged nearly 40 percent.  Even without the large influence of vehicles, the manufacturing output increased at an annualized 8.3 percent rate.  After slipping 4.0 percent in February, mining managed to increase 0.2 percent.  Keeping this indicator from falling into negative territory for the month was the output from the utilities; they managed a 1.5 percent gain after only improving by 0.1 percent the month before.

Also included in the Fed’s report is capacity utilization.  This attempts to quantify the proportion of capacity being used by the country’s physical producers.  March’s ratio fell slightly to 78.6 from 78.7 in February.  Year-over-year, capacity utilization has only improved by 1 percent, and despite being out of recession for close to three years, it has yet to reach its long-term average of 80.3 percent.  In a slight digression, this helps inform Atlas’ view on inflation.  Producers can still increase output without needing to drastically increase capital expenditures or payrolls.

The recent stagnation in industrial production is something Atlas is monitoring.  The one area that may continue to support this indicator as the year matures is the utilities sector.  If the country continues to experience record temperatures, it will be a windfall for of the up-line energy producers as air conditioners are turned on.  The corollary to added cooling costs is fewer discretionary dollars to be spent in other areas of the economy.  When suppressed consumption is combined with the seasonal smoothing techniques that will begin to restrain the headline figures of the indicators we watch, the thermometer may not be the only gauge with readings in the red.   (by C Cox)