Industry Market Trends

U.S. Industrial Production Increases in December

Jan 17, 2013

Total output from the U.S. industrial sector rose strongly in December and for the fourth quarter of 2012 as a whole, indicating continued resilience in business performance, particularly for the manufacturing industry, heading into the new year.

Industrial production in the United States edged up 0.3 percent in December, following a 1 percent gain in November, when production rebounded among industries that had been negatively affected by Hurricane Sandy in the fall, according to the U.S. Federal Reserve this week. The December reading was 2.2 percent above the figure for December 2011, while for the fourth quarter as a whole, industrial output grew at an annual rate of 1 percent.

Industrial production is now at its highest level since June 2008.

The bulk of the increase was driven by manufacturing production, which accounts for roughly 12 percent of the U.S. economy and is the largest segment of industrial production. Manufacturing output rose 0.8 percent in December, following a 1.3 percent gain in November and representing a 2.4 percent increase over December 2011. For the fourth quarter, manufacturing output grew 0.2 percent.

"Rebounds in housing, the auto industry and business investment combined with stabilization in global growth will probably support gains in manufacturing into this year," Bloomberg News notes. "The lack of inflation and an improving job market are also helping boost Americans' buying power, easing the risk that household spending will slump as the budget battles in Washington shake confidence."

Stronger performance in the auto industry, along with rebounds in business investment and housing, helped boost prospects in the factory sector. Motor vehicles and parts production increased 2.6 percent last month after surging 5.8 percent in November. Business equipment output rose 1.3 percent in December, and production of construction supplies advanced 1 percent.

Meanwhile, mining output grew 0.6 percent in December, following a 0.3 percent gain in November and marking a 3.3 percent increase over the level for December 2012. Utilities production, however, plunged 4.8 percent as unseasonably warm weather held down demand for heating.

The industrial capacity utilization rate, which indicates how much of the nation's production capabilities are currently in use, rose 0.1 points to 78.8 in December, a 1.6 percent increase over the utilization rate for December 2011. However, capacity usage remained 1.5 percentage points down from the long-run average between 1972 and 2011.

Despite the strong performance in the industrial sector, many analysts believe that sustained growth through 2013 depends on swift and effective government action to resolve lingering economic policy issues.

"Economists believe manufacturing could also get a boost from stronger business investment, provided that Congress raises the federal borrowing limit without a fight that damages business confidence," the Associated Press explains. "Companies are sitting on large amounts of cash. Analysts believe many are poised to start spending this year on computers, machinery and equipment to expand and modernize their operations."

In addition, global economic conditions are likely to play an important role in the production rebound. Key trading partners for the U.S. manufacturing industry, particularly the European Union and China, are facing major financial uncertainties that could undermine U.S. factory growth.

"While Eurozone troubles appear to be less of a global contagion threat, this is mostly due to the influence of monetary policy. The recession in the Euro area and the deep structural issues remain a concern. And while the slowdown in China and other large emerging markets that are critical to the health of U.S. factories has apparently bottomed, there are questions about the strength and timing of recovery," Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), noted. "All told, while the risk of an actual contraction in U.S. manufacturing output has diminished, the economic and policy climate in the U.S. and throughout the world suggests that slow growth for U.S. factories remains the most likely path for 2013."