U.S. Industrial Production Increases for Sixth Straight Month

The recovery in the U.S. industrial sector continued in December, as output at the nation's factories, mines and utilities rose 0.6% -- the sixth straight monthly output gain, the U.S. Federal Reserve announced Friday. The December gain was boosted by a large increase in output by electric and natural gas utilities, which were producing power at a high pace due to the bitterly cold start to the winter. Also, industrial production increased at a 7.0% annualized rate in the fourth quarter.Meanwhile, the factory utilization rate, also known as capacity utilization, rose to 72.0% in December from a revised 71.5% in November and a revised 71.0% in October. However, for 2009, the capacity-utilization rate remained 8.9 percentage points below its average for 1972-2008, the Fed said.

Economists surveyed by Bloomberg News had expected industrial production to increase 0.6% and capacity utilization to rise to 71.9% in December; industrial production rose a revised 0.6% in November and rose a revised 0.2% in October.

Cold Winter Boosts Utilities

In December, U.S. industrial production registered gains nearly every sector: As noted, utilities' production soared 5.9% due to the cold snap across much of the U.S., consumer goods production increased 0.6%, business equipment rose 0.9%, materials increased 0.8%, non-industrial supplies rose 0.1%, and mining rose 0.2%. Construction output fell 2.0%, and manufacturing fell 0.1%.

Investors should pay attention to industrial production and capacity utilization data because although manufacturing accounts for less than 20% of U.S. GDP, it accounts for most of the nation's cyclical growth. A pattern of declines in production indicates a softening economy; a pattern of rising production numbers points to the reverse. Likewise, a low capacity-utilization rate usually reflects softer demand; a high rate, stronger demand, with the potential for increased inflation.

One key to the U.S. manufacturing sector's rebound lies in the growth of high-end/tech-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 U.S., and most economists agree they are unlikely to return during the current economic expansion.

Economic Analysis

It was another impressive month for industrial production, and even though utilities production was distorted higher by the weather, December's overall industrial data supports the recovery thesis. Further, given lean inventories and decent demand, activity at the nation's factories, mines and utilities should continue to increase in the quarters ahead. When this data is combined with the rise in the Empire State Manufacturing Index, the picture is one of a U.S. factory sector that's gaining steam -- a bullish sign for U.S. GDP, corporate earnings, and, by extension, U.S. stock markets.
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