March 17, 2017
Industrial production rose 0.5% in March after having risen 0.1% in February and having declined 0.3% in January. However, the weather appears to have caused much of the early year drop (when the weather was much warmer than normal), and the March rebound (when weather conditions returned to normal.
Breaking industrial production down into its three major sub-components, the Fed indicated that manufacturing production (which represents 75% of the index) declined 0.4% in March after having risen 0.3% in both February. During the past year factory output has risen 1.4% (red line, right scale). It has clearly hit bottom. The drop in factory production in March was largely the result of a 3.0% decline in the production of motor vehicles and parts which are expected to rebound in April and May.
Mining (14%) output rose 0.1% in March after having jumped 2.9% in February and 1.3% in January. Over the past year mining output has risen 2.8%. But over the past three months mining production has actually increased at a 14.0% pace.
Most of the recent upturn in mining has been concentrated in oil and gas drilling activity which rose 7.7% in March after having surged by 15.1% in February and 5.4% in January. It has now risen for ten consecutive months. Over the course of the past year oil and gas well drilling has risen 52/5%. The number of oil rigs in operation continues to climb.
Utilities output jumped 8.6% in March. Utility output declined 5.8% in February and .8% in January because the weather was far above normal in both months. However, the weather returned to normal in March.
Production of high tech equipment rose 0.4% in March after having declined 0.5% February Over the past year high tech has risen 5.7%. The high tech sector sector appears to have gathered some momentum during the past several months. This may be an early indication that the long slide in nonresidential investment may be coming to an end which would, in turn, signal some upturn in productivity growth.
Capacity utilization in the manufacturing sector fell 0.3% in March to 75.3%. It is still below the 77.5% that is generally regarded as effective peak capacity. Above that level the factory sector is running too hot and prices begin to rise. While we are a ways from that so-called danger level, the reality is that manufacturing capacity is growing by about 0.1% per month while manufacturing output is rising by about 0.4%. Thus, going forward the utilization rate in the manufacturing sector should rise about 0.3% per month. At that pace, the utilization rate will hit that so-called “full employment” threshold by late summer or the fall.