February’s production decreased by a more-than-anticipated 0.6% (a decline of 0.1% was expected), following a similar fall in February. This is the fifth monthly decline in the last six months. At 74.8% in March, capacity utilisation was significantly lower than in February, and is still signaling very little in the way of inflationary pressure. This report also includes the annual revisions, which revised down growth and capacity utilisation over the previous two years.
With regard to production by sector, weakness was again very broad. Production from utilities, mining, and materials was notably weaker, in part because of the warmer weather in the month (see table below). If utilities were excluded, production would still have been 0.5% lower in the month.
March’s industrial production weakness was a little more than simply further energy price weakness and warmer weather. If energy production were excluded from the total, production would still have declined by 0.3% in the month, and 0.2% higher than a year ago, relative to the current aggregate total of -2.0%. The recent increase in energy prices is tentatively positive for manufacturing, although with inventories still extremely high and many producers still in difficulty yet still in production mode, a strong and sustained rebound seems unlikely. Particularly when the Chinese investment demand-drive boom is over, and we are still waiting for the consumption-driven boom to really ignite, the dollar remains so strong and when inventory to sales ratios are also still very high across most sectors. Expectations for a lasting and binding agreement in Doha this weekend look slim. Meanwhile, reports from the corporate sector remains mixed (at best), with many still reporting a very weak environment. Bottom line, this month’s weakness reflects the high levels of inventories, the strong dollar, and the ongoing weakness in global demand, with no sign of an imminent turn despite better ISM readings of late.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.