Source: Wells Fargo Securities Economics Group
Gain in Industrial Production Is Stronger Than It Looks
Industrial production rose 0.3 percent in December, which was in line with
market expectations. Although this represents a slowdown from
November’s 1.o percent gain, the report’s underlying details show more
strength in the industrial sector than the topline figure suggests. Due to an
unusually warm December, the headline gain was dragged down by a
4.8 percent decline in utilities output. According to NOAA, this past
December was the 10th warmest on record. As a result, natural gas
production plunged 11.3 percent, while electricity output fell 3.8 percent.
More telltale signs of the underlying strength in the industrial sector look a
little better. Manufacturing production, which has for the most part moved
sideways over the course of 2012, rose 0.8 percent in December. This puts
manufacturing output back above its previous high-water mark of the year
and at its highest level since mid-2008. Production gains were fairly
widespread across industries. Following a 5.8 percent gain in November,
motor vehicles and parts production advanced 2.6 percent. The recent
strength in vehicle production appears to be in line with stronger sales to
dealers and improved auto sales over the past two months. Machinery,
computer and electronics, primary metals and miscellaneous
manufacturing industries also posted healthy monthly gains.
Mining production continues to advance, increasing 0.6 percent over the
month. Mining has shown the largest gains of the major industrial sectors
over the past year and is up 3.3 percent from last December. The oil and gas
boom continues to drive gains in the mining sector; oil and gas extraction is
up 8.0 percent over the past year versus a 4.1 percent decline in non-oil and
gas mining.
Outlook for Industrial Production Still Cloudy
While the details of today’s report are encouraging, yesterday’s release of
the New York Fed’s Empire State Manufacturing Survey leaves us hesitant
to call the all-clear for the manufacturing sector just yet. Respondents
noted that general business conditions continued to deteriorate in January,
with the index in negative territory for a sixth consecutive month. New
orders also weakened, slipping to -7.2 from -3.4 in December. While this
survey is only the first of a handful of PMI readings we will see over the
coming weeks, it keeps us guarded in our hopes for a significant pickup in
manufacturing activity in the near term.
We believe that manufacturing activity will be generally weak through the
early part of the year before gaining more steam once fiscal policy issues
are further cleared up and the global economy strengthens. However, given
the weak start to the year, we expect total industrial production to increase
around 2 percent in 2013 versus a 3.7 percent gain in 2012.