March 17, 2017
Industrial production was unchanged in February after having declined 0.1% in January. On the surface that is unimpressive, but it masks a significant rebound in manufacturing activity. In both months the unseasonably mild winter weather conditions caused utility output to decline about 5.5%. If utility output had been unchanged in both months overall industrial production would have risen 0.6% in February after having risen 0.5% in January. Gains of that magnitude would create an entirely different impression of what is happening in the production sector. We know that the weather has already returned to normal throughout most of the country, so March and April are likely to see out-sized gains in production of perhaps 1.0% in each month.
Breaking industrial production down into its three major sub-components, the Fed indicated that manufacturing production (which represents 75% of the index) rose 0.5% in both January and February. During the past year factory output has risen 1.2% (red line, right scale). It has clearly hit bottom. While it has risen 1.2% in the past year, it has climbed at a 3.3% pace in the past six months, and an impressive 4.8% pace in the past three months.
Mining (14%) output jumped 2.7% in February after having climbed 2.2% in January. Over the past year mining output has risen 1.8%%. 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 7.1% in January after having risen 8.5% in January. It has now risen for nine consecutive months. Over the course of the past year oil and gas well drilling has risen 31.0%. The number of oil rigs in operation continues to climb.
Utilities output fell 5.7% in February after having declined 5.7% in January because the weather was far above normal in both months. However, the weather has returned to normal, or even a bit below normal,in March so we should expect sizable increases in utility output in each of the next couple of months.
Production of high tech equipment rose 0.2% in February after having declined 0.2% in January. Over the past year high tech has risen 6.5%. The high 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 rose 0.3% in February to 75.6%. 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.