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US Industrial Production Falls, Offline Capacity Rises to Recession Level

Posted by Joseph Trevisani on Dec 16, 2015 1:12:11 PM

The output of American factories, mines and utilities fell sharply in November, bringing the idle portion of the U.S. industrial plant to its highest level in almost two years and suggesting that economic growth is waning in the fourth quarter.  

Industrial production plunged 0.6 percent in November, the third negative month in a row and the steepest drop in three and a half years, according to the Federal Reserve on Wednesday.  Economists had predicted a 0.2 percent decline. October's drop doubled on revision to -0.4 percent. Output has fallen in nine of eleven months this year, the highest percentage of monthly declines since the period of July 2008 through May 2009.  

Capacity utilization, the percent of the U.S. industrial establishment in productive use, also slipped sharply in November falling to 76.95 percent, from 77.48 percent prior. This is its lowest level since January 2014. Almost one quarter of U.S. industrial capacity lay unused in November and the percentage inproduction has fallen steadily since reaching the post-recession high of 79.04 percent in November 2014.  The 75.73 percent average since the end of the downturn in June 2009 is the lowest of any post-war economic recovery.

The drop in industrial productions was partially due to mild fall weather in most of the country, prompting a 4.3 percent contraction in the utilities index as far fewer homes and buildings turned on their heat.  Oil and natural gas drilling, counted by the Fed as part of mining activity, has fallen dramatically as crude oil prices have plummeted, and is now at levels not seen for over 15 years.  

Manufacturing output remained unchanged in the month, supported by non-durable consumer goods, though missing the 0.1 percent gain expected by analysts.  Durable goods production declined 0.2 percent led by a falling automobile output. 

Annual industrial production in the year to November declined 1.17 percent from a 0.27 percent gain the previous month. This is the first yearly drop since December 2009.

Annual declines in industrial output are rare. In the last thirty five years, each time annual production went negative the economy was either in or entering a recession.  

Capacity utilization shows a similar though less correlated pattern. In the recessions of 1981-82, 2001 and 2007-09 the economy was already in recession when the utilization level fell beneath 77 percent. However in the short recessions of 1979-80 and 1990-91 capacity utilization was in the low 80s as the economic downturn began and never dropped below 78 percent. 

In a separate report Markit Economics said that its preliminary manufacturing purchasing managers index for December slipped to 51.3 from 52.8 in November. This was lowest reading since October 2012 and well below the consensus estimate of 52.6.  The new orders index collapsed to its worst level since September 2009 and production volume was the weakest since October 2013. 

Manufacturing has an inordinate value as an indicator despite its relative minor role in overall economic activity. As Market noted in its write-up, “Although manufacturing only accounts for around one-tenth of the economy, the manufacturing PMI exhibits a high correlation of 77% with GDP as industrial activity has an important cyclical impact on other parts of the economy.”


Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg







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