In March, total Industrial Production rose by 0.1%. While that is a slowdown from recent growth rates, and far below consensus expectations of 0.7% growth, if one looks beyond the headline number, it is actually a fairly positive report.
For starters, each of the previous three months was revised higher, with growth in February now estimated at 0.3% rather than the original 0.1%, January rising 1.0% instead of 0.9% and December showing growth of 0.7% rather than 0.5%. Those upward revisions are a very good omen for first quarter GDP growth.
Year over year, industrial production is up 4.0%. Total industrial production includes not just the output of the nation’s factories, but of its mines and utilities as well. It is the utility portion that tends to cause the most mischief in the numbers. Utility output, at least over the short term, is far more a function of the weather than it is of economic activity.
Output by Sector
If we just look at manufacturing output, the numbers look much better, with growth of 0.9%. The February numbers for manufacturing output were also revised sharply higher to a gain of 0.2% rather than a decline of 0.2%.
Factory output was up 4.6% year over year. I will grant you that the comparisons from a year ago are pretty easy, but still it’s a nice gain.
Output of finished products rose 0.3% on top of gains of 0.2% in February and 1.2% in January, and are up 3.8% year over year. In recent months, it has been the output of business equipment that has been leading the charge, after it had fallen off very sharply in the first half of 2009. Business equipment output rose 1.4% in March on top of a 0.7% gain in February, a 1.5% gain in January and a 1.2% rise in December. Despite that string of impressive gains, output is only up 3.6% year over year.
As the ugly months of a year ago roll off, the year-over-year figures should start to increase dramatically in the months ahead, since output is up 4.9% over just the last four months. Output of consumer goods has been more stable, and more sluggish of late, falling 0.2% on top of a 0.1% decline in February. Year over year, consumer goods output is up 3.3%.
Mine output has been soaring lately, posting a gain of 2.3% in March on top of a 1.7% gain in February and a 2.2% rise in January — and is up 5.2% year over year. Like the output of business equipment, the year-over-year numbers are poised to jump sharply in the months ahead.
The real fly in the ointment for the March output numbers was Utility output, which plunged 6.4%. The weather was simply much nicer in March, even if you seasonally adjust, than it was in February when blizzards buried the eastern half of the country.
In many ways the March report looks like the mirror image of the December report, where a 7.6% jump in utility output kept the total Industrial Production numbers in positive territory even in the face of lower output from both mines and factories.
Capacity Utilization
Total capacity utilization rose to 73.2% in March from 73.0% in February and 72.7% in January, and has been rising each month since last June. Like the Industrial Production numbers, each of the previous three months was revised higher, by 0.3% in the case of February and by 0.2% for both January and December.
While it is good to see capacity utilization rising, it is important to recognize just how awful the numbers had gotten to. The long-term average level of capacity utilization is 80.6%.
As a quick rule of thumb, 80% represents a healthy, normal economy. If capacity utilization moves up towards 85%, it means the economy is about to over-heat and accelerating inflation is a very real threat. A level of 75% is associated with a recession. The capacity utilization numbers only go back to 1967, but prior to this downturn, the lowest level recorded was 70.9% in December 1982. Last June, we got down to 68.3%.
Put another way, after 9 straight months of rising capacity utilization, the level is still below anything we have ever seen, with the exception of a few of the worst months of the deep Reagan recession. This is illustrated in the graph below (from http://www.calculatedriskblog.com/).
The total capacity utilization numbers suffer from the same utility/weather flaw that the Industrial Production numbers have. It is much more useful to focus on the capacity utilization numbers for manufacturing. That rose to 70.0% up from 69.4% in February and 69.1% in January. The February numbers were also revised sharply higher from the originally reported 69.0%.
To give the same sort of historical perspective, the long-term average manufacturing utilization rate is 79.2%, and prior to this recession the worst-ever recorded was 67.9%. We got down to 65.2% last June.
Yes, things in manufacturing are getting better, and have been since last June, but they were starting from a place much worse than anything the country had seen since the Great Depression. The improvement in capacity utilization for both manufacturing and overall is also overstated a bit since the total capacity has been shrinking, by 1.2% overall and 1.5% in manufacturing. If some factories are shut down for good and dismantled, it is easier to work the remaining factories at closer to full capacity.
Mining and Utilities
Mine utilization, on the other hand, has fully recovered and is now running at 0.2%, which is substantially above the long-term average rate of 87.5%, and up sharply from the 88.2% rate in February and the 86.6% rate in January. This probably very good news for the mining firms with big operations domestically, such as Freeport McMoRan (FCX) and coal miners like Peabody Energy (BTU), as mines tend to have a fair amount of operating leverage.
In contrast, utility utilization plunged to 78.6% from 84.1% in February as better weather meant that people were not using as much electricity. The long-term average is 86.6% for utility utilization. Unlike manufacturing, capacity has actually expanded for utilities over the last year, by 1.9%.
The weakness in utilities masked the improvement elsewhere in the economy. If one looks past that, this was actually a very solid report, at least in terms of the direction we are headed, even if the location is still a pretty bad one.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
