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Wells Fargo Securities Economics Group: Industrial Production Ticks Up in December

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.

Total Industrial Production Growth, Manufacturing Production, New York Manufacturing General Business Conditions Charts


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