The nation's factories continue to show signs that they will support economic growth in the immediate quarters ahead, as manufacturing output rose 0.5% in October -- the sector's biggest gain in three months -- the Federal Reserve announced Tuesday.
Overall industrial production was flat in October, but that neutral performance was heavily weighed down by a 3.4% plunge in utilities production -- something that occurs annually in early fall, as electric power demand declines after the summer cooling season ends. Also in October, mining production dipped 0.1%.
Capacity utilization was unchanged at 74.8% in October. The 74.8% utilization rate is up 5.3% from a year ago, and that's up from the 4.2% over-over-year increase recorded in September, but it's still 5.8% below the 1972-2009 average.
The consensus of economists surveyed by Bloomberg had been that industrial production would rise 0.3% in October after its 0.2% decline in September, and a 0.2% gain in August. That same survey also had predicted the capacity utilization rate would rise to 74.9%.
A Retrospective Win for Manufacturing in October
October's industrial production report represented a double win for the nation's manufacturing sector. In addition to October's 0.5% manufacturing sector surge, September's manufacturing output was revised to a 0.1% increase, substantially better than the initially released estimate of a 0.2% decline.
Economists, business executives and institutional investors pay attention to industrial production and capacity utilization data because although manufacturing accounts for 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, while rising production suggests the reverse. A low capacity utilization rate usually reflects softer demand, while a high rate predicts strong demand, with the potential for increased inflation.
October's industrial production report falls in the category of a modest positive for the economic bulls. The U.S. manufacturing sector's output continues to increase, propelled higher by slightly higher domestic demand and strong demand from international customers.
If the dollar -- which fell slightly in early autumn versus the world's other major currencies -- remains near present levels, it would help further boost international demand for U.S. industrial goods. Under those conditions, we could expect the manufacturing sector to continue to be a major growth engine for the nation's economic expansion through at least the first quarter of 2011.