Industrial Production Increases for Seventh Consecutive Month

Output at U.S. factories, mines and utilities -- industrial production -- rose 0.9% in January -- the seventh straight monthly output gain, the U.S. Federal Reserve announced Wednesday.Further, industrial production rose a revised 0.7% in December, up from the previous estimate of 0.6%.

Meanwhile, the factory utilization rate, also known as capacity utilization, rose to 72.6% in January from a revised 71.9% in December and 71.3% in November. What's more, it's the highest capacity utilization rate since December 2008.

Also, the capacity utilization rate is now 8.0 percentage points below its average for 1972-2008, the Fed said, still lower than where utilization should be, but nevertheless better than the 8.9-percentage-point below-average level recorded in December.

A Bloomberg News economists' survey had expected industrial production to increase 0.8% in January; it rose 0.6% in November, and 0.2% in October. That same survey also expected capacity utilization to rise to 72.6% in January.

Broad-Based Factory Gains

In January, U.S. industrial production registered a broad-based gain -- with output increases in every market group: consumer production increased 1.1%, business equipment rose 0.9%, materials increased 0.8%, non-industrial supplies rose 0.7%, and construction output increased 1.0%. By industrial group: manufacturing climbed 1.0%, mining rose 0.7% and utilities production rose 0.7%.

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. Continuing 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 potential for increased inflation.

One key to the U.S. manufacturing sector's rebound concerns the growth of high-end and 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 United States and are not likely to return during the current economic expansion, most economists agree.

Economic Analysis

January was yet another impressive month for industrial production, and the gains were especially impressive due to the fact that there were no laggards: every industrial segment registered an increase. Moreover, the length of the industrial production expansion points to gains beyond mere inventory replacement.

Further, when combined with the rising Empire State Manufacturing Index, the picture is one of a factory sector that's gaining steam -- a bullish sign for U.S. GDP, corporate earnings, and, by extension, the U.S. stock markets.
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