February’s production was unchanged, following a decrease of 0.1% in January. At 75.4% in February, capacity utilisation continues to be quite low, well below the traditional inflation warning mark of 80%. This driver still signals little in the way of inflationary capacity constraints.
With regard to production by sector, activity was quite mixed. Production rose for mining, construction, business equipment, and manufacturing, while the main areas of weakness related to utilities and consumer goods. Automobile assemblies continue to decline, falling 0.5% in February. Total vehicle assemblies, however, are still being held up by light trucks, though this too may be rolling over. Excluding the weakness in utilities (which was due to unseasonally warm weather), production would have been 0.7% higher in the month.
The flat reading in February was a little disappointing, though the majority of change was due to a drop in utilities production. Recent sentiment surveys from manufacturers and, in particular, from smaller businesses have surged to levels not seen for many years (e.g., the ISM and the NFIB small business’s optimism index is now the highest since 2004), driven by the promise of corporate tax cuts, lower regulation, repatriation of capital, and border adjustment taxes. The key question now is whether or not these hopes will be fulfilled. Yet even if this extra fiscal support is much more modest than expected, we remain optimistic about business investment in the coming years, particularly as pressure from wages starts to rise.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.