Industrial Production Increases, Despite Signs of Weakness
April 18, 2013
U.S. industrial output increased in March, but the gain was driven solely by an upswing in utilities caused by unseasonal temperatures, while manufacturing and mining production posted modest declines.
Industrial production in the U.S. rose 0.4 percent in March, following an upwardly revised 1.1 percent gain in February, according to the U.S. Federal Reserve. On a year-over-year basis, industrial output was 3.5 percent above the level for March 2012. For the first quarter as whole, industrial production grew at an annual rate of 5 percent, the fastest pace since the first quarter of 2012.
While experts had predicted production would climb last month, the size of the gain came as a surprise, as economists polled by Reuters had forecast a 0.2 percent increase for March.
Last month’s upswing was largely driven by a surge in utilities output, which jumped 5.3 percent, the biggest gain since February 2007, as unusually cold weather drove up heating demand. With increases in January, February, and March, utilities output grew at an annual rate of 10.5 percent in the first quarter.
Manufacturing production, which represents three-quarters of total industrial output and accounts for roughly 12 percent of the U.S. economy, decreased 0.1 percent in March after having risen 0.9 percent in February. For the first quarter, manufacturing output rose at an annual rate of 5.3 percent.
“Output is slowing as companies try to limit inventories amid concern the world’s largest economy will slow as automatic cuts in planned federal spending take effect,” Bloomberg News reports. “Manufacturers such as rail-car maker Greenbrier Cos. project an improvement in the second half of the year, a sign business investment is unlikely to retrench.”
Last month’s decline in manufacturing output was widely based, with decreases of over 1 percent for primary metals, electrical equipment, appliances, and components. However, auto production was a bright spot, with motor vehicle and parts output climbing 2.6 percent in March, following a 2.9 percent gain in February. Automotive production increased 13.2 percent for the quarter as a whole.
Excluding the automotive category, total manufacturing production dropped 0.3 percent last month, the steepest decline since October 2012.
“Pent-up demand for motor vehicles is clearly a driving factor in the pace of the manufacturing recovery,” according to Daniel J. Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation. “It is important to remember, though, that manufacturing is still climbing out of the 2008-2009 recession. While the general economy was fully recovered in September 2011, manufacturing is in the recovery phase – only 75 percent recovered from the recession – and is not expected to achieve the December 2007 production level until very late in 2014.”
Output of business equipment inched up 0.1 percent in March, as a 1.8 percent gain in transit equipment offset a 1.6 percent decline in information processing equipment. Production of industrial machinery rose 0.1 percent last month.
Construction supplies dropped 1.3 percent last month, ending four consecutive months of gains, but construction output for the first quarter as a whole surged 15 percent, following a 7.2 percent gain in the fourth quarter of 2012.
Meanwhile, mining output posted a 0.2 percent decrease in March, following a 0.9 percent gain in February. Mining production edged down at an annual rate of 0.2 percent in the first quarter.
The capacity utilization rate, which measures how much of the country’s industrial production capabilities are in use, picked up last month, climbing to 78.5 percent from 78.3 percent in February. Although utilization is 1.2 percentage points above the total for March 2012, it remained 1.7 percentage points below the 1972-2012 long-run average.
In the manufacturing sector alone, capacity utilization edged down to 76.4 percent in March from 76.6 percent in February, but remained 1.6 percentage points above the level for March 2012. Utilization in the factory sector last month stood 2.3 percentage points below the long-run average.
"We have seen this pattern for the last couple of years, where production surges in the first quarter and then is followed by a lull as excessive inventories adjust. MAPI believes that manufacturing production activity is repeating this pattern again in 2013,” Meckstroth said. “Consumers are income-constrained (from slow wage growth and higher payroll taxes), businesses are cautious, exports are weak, and government is in full austerity mode. It still looks like only modest growth is possible in 2013.”