Industrial production inches up in October

The recovery in the industrial sector continues, albeit at a mild pace, as output at U.S. factories, mines, and utilities rose just 0.1% in October, following a 0.7% rise in September, the U.S. Federal Reserve announced Tuesday.

Further, most sectors registered declines in October, with the utilities sector output helping to tip the scale by rising 1.6%.

Meanwhile, the factory utilization rate, also known as capacity utilization, rose to 70.7% in October from 70.5% in September. The capacity utilization rate is still 10.2 percentage points below its average for 1972-2008, the Fed said.

Economists surveyed by Bloomberg News had expected industrial production to increase 0.4% and capacity utilization to total 70.7% in October.

In October, construction activity fell 1.2%, non-industrial supplies sank 0.3%, mining fell 0.2%, business equipment production declined 0.2%, final products and consumer goods were both unchanged, and materials rose 0.3%.

Investors should pay attention to industrial production and capacity utilization data because although manufacturing makes up less than 20 percent of U.S. GDP, it accounts for most of the nation's cyclical growth. Continual declines in production point to a softening economy; rising, the reverse. A low capacity utilization rate usually reflects softer demand; a high rate, strong demand, with the possibility of increasing inflation.

One key to the U.S. manufacturing sector's rebound concerns the growth of high-end, technology-intensive manufacturing, such as solar panels, wind mill turbines, commercial airplanes, and smart devices. That's because many jobs in low-end manufacturing have shifted to lower-cost labor centers outside the United States and are not likely to return during the current economic expansion, most economists agree.

Economic Analysis

Just call it a minor setback on the manufacturing front during October, as the 0.1% industrial production increase came in below the consensus estimate and the capacity utilization rose only by a modest amount. The economic recovery narrative remains in place, and one month's factory data is not enough to alter a 2010 U.S. GDP projection.

Still, some economists will seize upon the October industrial data to predict weak GDP growth for the new year, but that would be premature: The condition of the job market in the immediate quarters ahead, that is, whether lay-offs have ended, will say a lot about demand in 2010, and by extension about 2010 U.S. GDP.

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