January 18, 2023 | 10:07
Industrial Production is Feeling the Hikes
U.S. industrial production plunged 0.7% in December (deeper than expected), marking the second straight decline. To say that a further slowdown in industrial production was telegraphed in advance would be an understatement. The ISM Manufacturing PMI already pointed to a second month of contraction in December and the Empire State Manufacturing Index sank 22 points in January to -32.9. Alongside the pressures that households are feeling from rising interest rates and still-high inflation, consumers are continuing to shift spending away from goods to services, and cutting back overall. That is weighing more heavily on factories.
As for the details of the report, they were similarly dour. November's initial 0.2% drop was revised lower to -0.6%, which leaves industrial production down by 1.7% annualized in the fourth quarter. Manufacturing was the driving force behind the weak print with output falling 1.3%—the biggest monthly drop since February 2021, though likely aggravated by a winter storm. Moreover, November's 0.6% slowdown was revised down to -1.1%. Putting it all together, manufacturing slid 2.5% annualized in the fourth quarter. With crude oil and other commodity prices still in retreat in December, mining production slowed by a further 0.9%. Non-durables manufacturing also likely succumbed to the pressure of falling energy prices with output sliding 1.5%. On the other side of the ledger, utilities rebounded in December with the bout of more seasonal (read: winter) weather, rising 3.8% (November was also revised up to 4.5%). While the recent trends are concerning, industrial production (+1.6% y/y) remains above its year-ago level. The same can't be said for manufacturing, which is running nearly 0.5% below December 2021.
Now there were some details in this report that should bring a smile to Governor Powell's face. Capacity utilization dropped 0.6 ppts to 78.8%, bringing it 0.8 ppts below its long-run average. That is likely to help reinforce the slowing trend in goods inflation. Similarly, manufacturing capacity utilization sank 1.0 ppt to 77.5%, which is also below its long-run average (-0.7 ppts).
Bottom Line: The aggressive policy rate hikes are starting to take a bite out of the factory sector, which, in turn, should weigh toward a slower pace of Fed tightening ahead.