Source: Wells Fargo Securities, LLC Economics Group
Industrial Production Picks Up Over the Month
Industrial production increased 0.7 percent in February, exceeding
expectations of a 0.4 percent gain. In addition to the better-than-expected
headline, output in November and January was revised higher. Following
an upwardly revised 4.9 percent increase in January, utilities output rose
1.6 percent in February. Utilities output bounced around over the prior two
months due to warmer-than-average weather in December, but
temperatures nearer to their long-term averages in January and February
led to a more modest gain in February. The 0.8 percent increase in
manufacturing output was more encouraging. This reversed January’s 0.3
percent decline with a pickup in both durable and nondurable industries.
Across markets, production of consumer goods rose for the fourth
consecutive month. Consumer durables rose 1.7 percent, as automotive and
home electronics partially rebounded from a pullback in January.
Consumer spending has held up a bit better in light of higher taxes so far
this year, which may have encouraged businesses to increase production in
February. The average age of consumer durable goods is at a post-World
War II high. Pent-up demand should support further gains in this category
as rising asset prices help consumers feel better about their financial
position. Output of business equipment also saw broad gains and is now up
6.6 percent over the past year.
Capacity utilization across the industrial sector rose to 79.6 percent,
reversing last month’s dip. The gain represents a new cyclical high, but
capacity utilization remains 1.2 percentage points below its 2007 level.
Utilization rates in February rose for the manufacturing and utilities sector,
but dipped for mining industries. Production in mining fell 0.6 percent in
February, the third straight month of decline. The pullback has primarily
stemmed from reduction in crude oil extraction. However, thanks to the
shale gas boom in recent years, mining output remains well above its prerecession
level while manufacturing production has yet to fully recovery.
Business Spending Set to Improve over 2013
Today’s report substantiates some of the firming we have seen in the PMI
reports. The ISM manufacturing index rose to its highest level in a year and
half in February, while the bulk of the regional PMIs have moved into
expansion territory. In a separate report released this morning, the Empire
State Manufacturing Survey showed that factory sector activity in New York
continued to expand at a decent pace in March. Capital expenditure plans
also seem to be improving among businesses. The Empire survey showed
spending plans accelerated further in March, while a growing share of small
businesses reported plans to increase investment in February. We expect
business spending to gradually pick up over the year as the U.S. and global
economies strengthen.