Today’s industrial production report, for February, shows weak headline numbers. Manufacturing, however, shows strength. Is this yet another weather-related industrial production report?

Industrial production was unchanged in February following a 0.1 percent decrease in January. In February, manufacturing output moved up 0.5 percent for its sixth consecutive monthly increase. Mining output jumped 2.7 percent, but the index for utilities fell 5.7 percent, as continued unseasonably warm weather further reduced demand for heating. At 104.7 percent of its 2012 average, total industrial production in February was 0.3 percent above its level of a year earlier. Capacity utilization for the industrial sector declined 0.1 percentage point in February to 75.4 percent, a rate that is 4.5 percentage points below its long-run (1972–2016) average.

Market Groups

Most of the major non-energy market groups recorded increases in February. For a second consecutive month, however, a drop in the output of utilities contributed substantially to losses in the overall indexes for consumer goods, business supplies, and materials through their energy components. The production of consumer goods moved down 0.4 percent overall, reflecting a drop in consumer energy products. The index for consumer durables was unchanged, as a loss of 3.6 percent in appliances, furniture, and carpeting was outweighed by increases in other groups. The production of consumer non-energy nondurables rose 0.3 percent because of improvements in foods and tobacco and in clothing. The output of business equipment moved up 0.7 percent, with both information processing equipment and industrial and other equipment recording increases. The output of construction supplies jumped 1.3 percent; the index has advanced more than 4 percent over the past six months. The indexes for non-energy business supplies and non-energy materials each rose more than 1/2 percent. Within materials, both durable and nondurable materials posted gains.

Industry Groups

Manufacturing output rose 0.5 percent in February for a second consecutive month. Led by advances of more than 1 percent for nonmetallic mineral products, fabricated metal products, and machinery, the production of durables increased 0.6 percent. The electrical equipment, appliance, and component industry and the furniture and related products industry registered the only substantial losses within durables, about 1.5 percent each. The index for nondurables rose 0.4 percent; gains of more than 1 percent were recorded by paper and by plastics and rubber products, while the only losses were posted by textile and product mills and by chemicals. The output of other manufacturing (publishing and logging) fell 0.5 percent.

The output of mining jumped 2.7 percent in February, with widespread gains among its components, after moving up 2.2 percent in January. The mining index in February was 1.8 percent higher than its year-earlier level.

Capacity utilization for manufacturing rose 0.3 percentage point in February to 75.6 percent, a rate that is 2.8 percentage points below its long-run average. The operating rate for durables, at 76.7 percent, is 0.2 percentage point below its long-run average; the rates for nondurables and for other manufacturing (publishing and logging), at 75.4 percent and 60.5 percent, respectively, remain significantly below their long-run averages. Utilization for mining jumped 2.1 percentage points to 80.5 percent but is still well below its long-run average. The operating rate for utilities fell 4.4 percentage points to 70.9 percent, its lowest recorded level.

Industrial Production Index

Industrial Production Manufacturing

Industrial Production Crude

Industrial Production Motor Vehicles and Parts

Industrial Production Index Percent Change From Year Ago

Industrial Production Manufacturing – Percent Change from Year Ago

Industrial Production Motor Vehicles and Parts Percent Change From Year Ago

Industrial Production Crude Percent Change From Year Ago

Year-Over-Year Numbers

  • Index: +0.31%
  • Manufacturing: +1.39%
  • Motor Vehicles and Parts: +2.62%
  • Crude: -1.96%

These charts give credence to the theory that the regional Fed manufacturing reports are indeed picking up. However, the pace is much slower than the huge jumps in the regional reports would seem to suggest.

Philadelphia Fed Manufacturing Index

According to the Philly Fed diffusion index, manufacturing has been getting stronger since mid-2016.

This month, the manufacturing activity index registered +32.8. Las month the index was 43.3, the best showing in over 10 years.

That’s just one regional report, but most of them have been strengthening for some time.

The industrial production numbers are just now starting to pick this up, and the year-over-year numbers are still very weak against what should be very easy comparisons.

Why Doesn’t Factory Data Match?

I discussed this idea yesterday in Philly Fed, Another Strong Regional Activity Report: Why Doesn’t Factory Data Match?

  1. Perhaps the Fed will revise factory data higher.
  2. Perhaps strength in the regional reports simply has not shown up yet.
  3. Perhaps diffusion indexes are a poor way of estimating strength.

In regards to point number three, diffusion indexes can be a strange animal. New orders picking up by 1% at two small firms but down 15% at a larger firm is a net +1 to the index.

Diffusion indexes just measure direction, not strength of the move.

If manufacturing conditions are generally improving, yet barely improving, we would see reports like the Philly Fed and Empire State survey above, with actual factory data not matching.

Today, the manufacturing components jumped in a bit of a catch-up move that still lags.

Autos for the moment have stalled (see first motor vehicles and parts chart) although year-over-year numbers still look good.

Finally, Industrial production has been weak since  June of 2015, and is still weak today. The weather has not been that cool in summer (slowing electricity) and that warm in winter (slowing need for heat), for that period of time.

Mike “Mish” Shedlock