Industrial Production Strong Despite Seasonal Drop in Utilities

Production rises at factories
Production rises at factories

Output in the nation's factories, utilities, and mines increased just 0.1% in March, a total weighed down by a plunge in utilities output, the U.S. Federal Reserve announced Thursday.

However, despite a 6.4% drop in utilities, factory production rose a substantial 0.9% in March -- and 6.6% for the first quarter.

In addition, the factory utilization rate, also known as capacity utilization, rose to 73.2% from a revised 73.0% in February -- the highest capacity utilization rate since November 2008. Factory utilization totaled 72.7% in January and 72.0% in December. The capacity utilization rate is now 7.4 percentage points below its average for 1972 to 2008, the Fed said, still lower than where it should be, but nevertheless inching up.

Economists surveyed by Bloomberg News had expected industrial production to increase 0.8% in March after rising 0.3% in February, up from the previously released 0.1%; it rose 1.0% in January and 0.7% in December. And capacity utlitzation was expected to rise to 73.4% in March.

Excluding Utilities, Another Strong Output Month

U.S. industrial production for March would have been much higher had utilities output not plummeted due to especially mild spring temperatures. Consumer production, which declined 0.2%, and non-industrial supplies, which declined 0.3%, also weighed on March's data. Construction output, however, increased 2.3%, and business equipment output rose 1.4%; materials output was unchanged. By major industrial group, manufacturing increased 0.9%, mining rose 2.3%, and utilities tumbled 6.4% for the month.

Investors should pay attention to industrial production and capacity utilization data because although manufacturing represents less than 20% of U.S. GDP, it accounts for a considerable portion 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 potential for increased inflation.

Discounting the seasonal plunge in utilities, March's industrial production data reveals a factory sector that continues to strengthen -- a trend that bodes well for U.S. GDP, and corporate revenue and earnings.

Originally published