February 14, 2020

Industrial production fell 0.3% in January after having declined 0.4% December.   During the past year industrial production has fallen 0.8%, but one year ago it was climbing at a 3.6% pace.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) fell 0.1% in January after having risen 0.1% in December.  During the past year factory production has declined 0.8%

To a large extent the prolonged drop in factory production is being curtailed by the trade sector and the impact of tariffs on both manufacturing firms that import components used in the production process from overseas, as well as firms that export goods to other countries because of their tit-for-tat increase in tariffs.  The ISM exports index plunged to the same basic level that we saw in the midst of the recession.  However, export orders have rebounded in recent months which suggests that most of the trade-related impact on growth is behind us.  Boeing’s continuing woes with its 787-MAX jet are contributing to the softness in the manufacturing sector.

Mining (14%) output rose 11.2% in January after having umped 1.5% in December.  Over the past year mining production has risen 3.1%.

However, over the last year oil and gas well drilling activity has fallen 24.0%. But a year ago drilling activity had risen 16.0%. .  Despite the drop-off in drilling activity crude oil output has surged in the past year.  The implication is that productivity in that sector continues to climb.

Utilities output fell 4.0% in January after having plunged by 6.2% in December. The decline in both months is almost certainly attributable to unusually warm weather in those months  which reduced the need for electricity.   This component of industrial production is always volatile.  During the past year utility output has fallen 6.2%.  Look for a rebound in the months ahead.

Production of high tech equipment rose 0.8% in January after having gained 1.1% in December. Over the past year high tech has risen 8.9%.  This series has still been climbing at a respectable rate probably because the tight labor market  is encouraging firms to spend money on technology to boost output without adding to headcount.  This should lead to a pickup in nonresidential investment which will, in turn, lead to a sustained pickup in productivity.

Capacity utilization in the manufacturing sector fell 0.1% in January to 75.1%.  It remains below the 77.4% level that is generally regarded as effective peak capacity.

Now that trade disputes between the U.S. and China have been partially resolved, and a new NAFTA agreement has been approved, factory output should climb slowly in the months ahead and push capacity utilization higher as well.

Stephen Slifer


Charleston, SC