November 16, 2022 | 10:41
Revisionist (Production) History
U.S. industrial production fell 0.1% in October, leaving it 3.3% above its year-ago level. Moreover, the previously sturdy 0.4% gain in September was revised down to just 0.1%. While industrial production remains above trend, the revisions indicate that growth has slowed significantly since the Fed begin its hiking cycle this spring—the overall index has risen just 0.4% since April.
However, the details of the report were stronger than the weak headline suggests. Manufacturing output increased 0.1% with motor vehicles and parts leading the way (+2.0%). Weighing down the headline reading was a 0.4% decline in mining output and a 1.5% drop in utilities. And even though nondurable goods production fell in October, energy-related sectors were also to blame there, as petroleum and coal products sank 1.9%. Rising rates are also starting to weigh on more interest rate sensitive parts of the economy (e.g., housing), as wood products output fell 2.5%—the third consecutive decline of more than 2%.
Another factor that is also making it difficult to maintain the robust recovery we've seen in industrial production so far this cycle, is the tight labour market. The Empire State Manufacturing Survey reported that two-thirds of respondents are still struggling to fill open positions. That, along with elevated rates and rising prices, are making it more challenging for firms to expand production. However, there was some good news on price pressures front this month as capacity utilization dropped 0.2 ppts to 79.9%, which coincides with the weaker-than-expected PPI reading for October.
Bottom Line: Industrial production still remains above trend, but is likely to continue slowing as rising rates and higher prices challenge firms' expansion plans.