April’s production increased by a more-than-anticipated 0.7% (an increase of 0.3% was expected), following a 0.9% decline in March. This is the first monthly increase since January. At 75.4% in April, capacity utilisation was tangibly higher than in March but still continues to trend in the wrong direction and, of course, is still signalling little in the way of inflationary pressure.
With regard to production by sector, strength was relatively broad, with the exception of mining (-2.3%). Production rose the most for utilities which accounted for most of the increase (5.8%), though consumer goods (1.2%) and business equipment (0.8%) were also robust. If utilities were excluded, production would have been unchanged in the month.
April’s increase in production was helpful, though it still feels like we are just kicking along the bottom. Production has never been this weak without the economy being in a recession, the strong dollar and the collapse in energy prices have been key culprits here on top of the middling rate of economic growth. Meanwhile, the inventory-to-sales ratio for merchant wholesalers (barring the last recession) has never been as high as it currently is since the series began in 1992. Furthermore, the latest Fed Senior Loan Officers’ Survey shows that lending standards have now been tightened for a third consecutive quarter for commercial and industrial loans as well as commercial real estate loans; historically, this has not been beneficial for production. Bottom line, this month’s report shows a moderately encouraging increase; however, the sector continues to be negatively impacted by the high levels of inventories, the strong dollar, and the ongoing weakness in global demand.
For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.
Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.