December’s production was 0.8% higher, following a decrease of 0.7% in November. At 75.5% in December, capacity utilisation continues to be quite low following a brief spurt upward in the summer; it still signals little in the way of inflationary capacity constraints.
With regard to production by sector, activity was broadly stronger. Production rose for all the major sectors with the exception of mining. Utilities production jumped the most, up 6.6%, following a mild November returning to more seasonal December temperatures. If utilities were excluded, production would have been 0.2% higher in the month. Excluding energy it would have been 0.1% higher.
The improvement in December is encouraging and while the majority of the increase was due to the rise in utilities production, recent sentiment surveys from manufacturers and in particular from smaller businesses has surged to levels not seen for many years (i.e., the NFIB small business optimism index is now the highest since 2004). The combination of corporate tax cuts, lower regulation, repatriation of capital, and border tax adjustments has excited many of the businesses that have been complaining about these hurdles to growth for many years. The key question for 2017 is whether or not these hopes will be fulfilled as either policy gets watered down by Congress, or President-elect Trump decides to change his stance on these issues as he has done on many other things in the past.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.