Industry Market Trends

U.S. Industrial Production Falls in January

Feb 20, 2013

U.S. industrial output fell slightly in January, largely due to declining motor vehicle output. However, newly revised data indicate that manufacturing production posted back-to-back monthly gains in late 2012 that were the strongest in decades.

Industrial production in the United States decreased 0.1 percent in January after climbing 0.4 percent in December, according to the U.S. Federal Reserve. Last month's decline was the first since October, when production dipped 0.3 percent. On a year-over-year basis, industrial output remained 2.1 percent higher than in January 2012 and close to the growth rate for the broader U.S. economy.

The January decrease was a surprise to most analysts, as economists polled by MarketWatch had forecast production to rise by 0.2 percent for the month.

Factory output, which accounts for roughly 12 percent of the U.S. economy and is the largest segment of industrial production, declined 0.4 percent in January. However, upward revisions to earlier data indicate that manufacturing surged by 1.1 percent in December and 1.7 percent in November, representing the highest two-month gain since 1984.

For the fourth quarter as a whole, manufacturing production is now estimated to have advanced at an annual rate of 1.9 percent, up considerably from the previous estimate of a 0.2 percent annual growth rate in Q4 2012.

"A pickup in consumer and business spending toward the end of 2012 and stabilization in overseas markets including China and Europe will help sales at companies such as Deere & Co. and Eaton Corp Plc.," Bloomberg News explains. "At the same time, a higher tax that is trimming Americans' paychecks and the risk of across-the-board cuts in federal outlays may prevent bigger gains in production."

The Fed's report indicates that the much of the January decline in manufacturing output was due to a slowdown in automotive production, which dropped 3.2 percent after a 2.9 percent gain in December. Excluding motor vehicles and parts, manufacturing production decreased just 0.1 percent last month.

Primary metals production also posted contraction, decreasing 2.6 percent in January, while smaller losses were reported for wood products; nonmetallic mineral products; computer and electronic products; electrical equipment, appliances, and components; and miscellaneous manufacturing

Meanwhile, production at mines declined 1 percent following no growth in December, and utilities output rose 3.5 percent, rebounding from a 4.5 percent decline the prior month, as demand for heating was boosted by temperatures closer to seasonal norms.

At 98.6 percent of its 2007 average, total industrial production in January was 2.1 percent above the prior-year level. Industry capacity utilization, which measures how much of the country's industrial production capabilities are in use, inched down 0.2 percentage to 79.1 percent in January, remaining 1.1 percentage points below the 1972-2012 average.

Although many manufacturers have been hurt by the recent slowdown in consumer spending and a weaker global market that has hindered demand for U.S. exports, economists expect industrial output to be healthy in 2013, primarily because many companies are sitting on significant cash reserves and are poised to increase investment in equipment and machinery.

Last month, production of business equipment surged 6.9 percent after a lackluster 0.1 percent gain in December, while consumer goods output rose 1.4 percent, rebounding from a 0.2 percent decline in late 2012.

"[T]he lingering weakness in the U.S. and global economies, as well as ongoing uncertainties over the path and impact of U.S. fiscal policy adjustments, are headwinds for U.S. manufacturing," Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), noted. "Fortunately, the global economic picture appears more stable, with policymakers apparently having prevented the worst of financial contagion in the Eurozone and with an apparent bottoming in the sharp emerging market slowdown. Global output will remain challenged for some time to come but the worst of the deceleration that plagued the world economy since the early months of 2012 has likely passed. Slow but steady growth remains the most likely path for U.S. manufacturing during 2013."