Industrial Production and Capacity Utilization: ‘per risum multum poteris cognoscere stultum’.

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Industrial Production and Capacity Utilization
Market Sensitivity: Medium.

What Is It: Records U.S. industry’s output and spare capacity.

News Release on the Internet: www.federalreserve.gov/releases/g17/current

Home Web Address: www.federalreserve.gov

Most Current Release Time: 9:15 a.m. (ET); released around the 15th of the month and reports on the previous month.

Frequency: Monthly.
Source: Federal Reserve Board.

Revisions: Modest changes are made for the previous three months, followed by an annual revision in the fall that can go back several years.”

Bernard Baumohl. “The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities.”

A rise for mining offsets a dip for utilities making a modest 0.2 percent gain for manufacturing the story for November’s industrial economy. This report’s manufacturing component has been the only uneven indicator on the factory sector all year which limits the surprise of November’s results.

Forecasters weren’t calling for much strength in the first place with consensus at only 0.3 percent for manufacturing. Vehicle production, after a run of strength, understandably eased in November to only a 0.1 percent increase in selected hi-tech also slowing but to a still useful 0.3 percent gain. And production of business equipment was even more positive at 0.5 percent and with construction supplies at 0.6 percent. Weakness on the manufacturing side is once again in consumer goods where volumes fell 0.4 percent to underscore the nation’s lack of competitiveness in this important category.

Outside of manufacturing, mining volumes rose 2.0 percent in November to extend its leading performance to year-on-year growth of 9.4 percent. Utility output fell 1.9 percent with this year-on-year rate at 2.3 percent. Turning back for a comparison with manufacturing, this year-on-year rate is a very modest 2.4 percent.

Overall industrial production rose 0.2 percent while capacity utilization rose 1 tenth to a 77.1 percent rate that, in contrast to the slew of anecdotal readings on the factory sector, points to plenty of spare capacity remaining. One notable positive in today’s report is an upward revision to October’s manufacturing production which now stands at a very outsized 1.4 percent, an isolated gain however that reflects hurricane effects.

Given the strength of October manufacturing and despite November’s modest showing, most signals are pointing to an accelerating factory contribution to the fourth-quarter economy. Note that traditional non-NAICS numbers for industrial production may differ marginally from NAICS basis figures.

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Market Impact

Bonds

Traders in the fixed-income market usually can anticipate changes in industrial production before the official release is out. What tips them off are earlier reports, such as factory hours worked (from the employment data), the purchasing managers report (based on the ISM survey), producer prices, and retail sales. Of course, surprises do happen from time to time. Should industrial production and capacity utilization jump by a greater-than-expected amount, this can prompt a sell-off in the bond market. This is particularly the case if the utilization rate climbs above 80%, a zone that can begin to drain resources, create bottlenecks, and accelerate inflation.
On the flip side, slower production along with falling utilization rates could raise bond prices and lower interest rates because the threat of inflation has subsided.

Stocks

Industrial production is not one of those high-profile indicators known to roil the equity market. Strong production is generally considered to be supportive of stock prices because it signifies more economic growth and better corporate profits. The only concern for stock investors is if higher production leads to excessively tight capacity and higher prices. Should the latter scenario emerge, stocks might react negatively to a jump in industrial output.
Dollar

Normally, the dollar reacts modestly to industrial production. Foreigners try to assess how production and capacity utilization will affect future inflation and interest rates in the U.S. Because a jump in industrial output suggests faster economic growth, it can increase foreign demand for dollar-based investments—or, at the very least, prevent U.S. currency from falling.”

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-R.W.N II

Source: Econoday The Federal Reserve.

 

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