In January, Total Industrial Production was unchanged. That was much weaker than the rise of 0.6% that was expected. Thus on the surface, this looks like a very weak report. However, as soon as one scratches below the surface, it was not all that bad. First and foremost were the revisions to previous months. Total production for December was revised up from a gain of 0.4% to a gain of 1.0%, and November was revised up from being unchanged. Year over year, total industrial production is up a solid, if not spectacular 3.4%.
Total Industrial Production is a broad measure. It tracks the output of not only the Nation’s factories, but of its mines and utility power plants as well. The utility numbers often distort the data, as utility output is often as much a function of the weather as it is of economic activity. The extremely mild winter is holding down electric demand. Utility output tumbled 2.5%, and that comes on top of a drop of 2.4% in December and a rise of just 0.1% in November. Year over year utility output is down 7.5%.
Mine output was also very weak this month, and I’m not exactly sure why, but it has been very solid up until this point. In January it dropped by 1.8%, more than erasing the gains of 0.9% and 0.7% in December and November, respectively. Year over year mine output is up 5.8%. Mine output includes oil and gas production, so the year over year gains are in part due to surging production of oil in North Dakota, and rising output of Natural gas from shale basins around the country. I suspect that the drop in mine output in January is just a temporary hiccup.
If one just looks at manufacturing production, this was another very strong report, with a rise of 0.7% on top of a 1.5% increase in December and a drop of 0.2% In November. The previous months were revised much higher. Previously, we thought factor output rose by “just” 0.9% in December and had fallen by 0.4% in November. Year over year, factory production is up a robust 4.5%.
Output of final products was up 0.4% after a rise of 0.9% in December and a 0.3% decline in November, and is up 3.3% year over year. Final product output is broken up in to two parts, and we see a real dichotomy between consumer goods output and business equipment production. Output of the later has been very strong, rising 1.8% in January on top of a 1.4% rise in December and a 0.6% increase in November and is up 10.9% year over year. Consumer goods production on the other hand fell 0.1% for the month, after having been up 0.8% in December but down 0.6% in November, and is up just 0.6% year over year.
The report also tracks Capacity Utilization, which is to my mind, one of the most under rated economic indicators there is. The total number has the same Utility/weather distortions as the industrial production numbers. It slipped slightly to 78.5% from 78.6% in December but still up from the 77.9% in November. However, December was revised sharply higher from 78.1%, and the November Number edged up from 77.8%. A year ago it was at 76.9%. At the depths of the Great Recession in June 2009, total capacity utilization has dropped to just 67.3%. The long term average is 80.3%. The year over year improvement faced a headwind from a 1.2% increase in overall capacity.
Here is the rule of thumb for capacity utilization. If it gets over 85%, that is a clear signal tot eh Fed that the economy is overheating, and inflation is about the start to accelerate. If it is near 80% then the economy is in its sweet spot, a goldilocks economy that is neither too hot, nor too cold. Readings of around 75 are what is usually associated with recessionary conditions.
Prior to the Great Recession, readings of under 70% almost never happened. The 67.3% low in June is stark evidence of just how incredibly bad the economy was in early to mid 2009. Thus, we are working our way back up to the sweet spot, but have a little ways to go. Inflation is not likely to be a serious problem until we are well over the long term average of 80.3%.
Factory utilization climbed to 77.0% from 76.5% last month, and from 75.4% in November. December was revised up from 75.9%, so relative to where we thought we were yesterday, factory utilization is up more than a full percentage point for the month. November was also revised slightly higher from 75.3%. A year ago it was 74.3%, and the low back in June of 2009 was just 64.4%. The long term average is 78.9%. Over the last year, our manufacturing capacity has increased by 1.0%.
Mine utilization fell to 91.5% from 93.3% in December, but that is still far above the year ago 88.2% and the long term average of 87.4%. The Great Recession low was 79.0%. Over the last year we have added a very strong 1.9% to mine capacity.
Utility power plant utilization was the real fly in the ointment, dropping to just 74.6% from 76.7% in December and 78.7% in November. It is down from 82.1% a year ago, and is now substantially below the 79.2% utilization at the bottom of the recession. This is a new record low (breaking last month’s record) for utility utilization. We have added 1.7% to our utility production capacity over the last year.
Utility power plants do not come cheap, and need to be operating at high levels to be profitable. The extremely low levels of utilization are a very bad sign for the utility sector. I would be very cautious about investing in firms like Dominion Resources (D), Teco Energy (TE) and PG&E (PCG) with utilization levels this low.
Thus, while the headlines were ugly, the actual report was pretty solid. This is more evidence that the economy is on the mend. The big upward revisions to December most likely indicate that the fourth quarter GDP numbers will be revised up.
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