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Wells Fargo Securities Economics Group: Industrial Production - a So-So Report in Disguise

Source: Wells Fargo Securities Economics Group

Total Output Growth Has Been Rather Slow
With the ISM index in contraction territory for two straight months and a number of regional PMIs also signaling a drop in output, today's 0.6 percent increase in industrial production makes a good first impression, but wait until you get to know it better.

The previous month's modest gain of 0.4 percent was cut down by revisions to reveal only a slight gain of 0.1 percent in June. Despite some choppiness from month to month, total output has been more or less flat for the past several months. In the five month period since February, industrial production has increased just 1.0 percent. With other major drivers of growth similarly struggling, the tepid pace of industrial production growth is enough to keep the economy from slipping back into recession, but not nearly strong enough to spur on a job and business spending-led economic expansion.

Auto Production is Revving its Engine
Manufacturing output increased 0.5 percent, led by a 3.3 percent jump in motor vehicle and parts production. This is one facet of output that is undeniably doing well. Not only is the increase in July auto production the strongest monthly jump since January, the overall volume level of auto production is now 3.0 percent larger than it was before the recession began. Given the fact that auto sales have not yet returned to their heady pace of 2006 and 2007, this may come as something of a surprise. The explanation has a lot to do with the fact that exports of automobiles and parts have crested above their previous highs. The challenge going forward for this key sector is whether or not domestic sales continue to recover and if exports continue to grow. Given our outlook for slower consumer spending and signs of weakening in the global economy, these challenges might prove to be substantial for automakers. Outside of autos and parts, manufacturing production was up just 0.2 percent and machinery output fell for the second time in three months.

Mining and Utilities
Mining production increased 1.2 percent in July and the output of the nation's utilities rose 1.3 percent. Natural gas output gave up some ground after three straight months of fairly substantial gains. Electricity output drove the gain in utilities production. According to the NOAA, July was the hottest month in more than 117 years of records.

Capacity Utilization
Capacity utilization climbed to 79.3, the highest rate so far in the current expansion, but still 1 percentage point below its 1972-2011 average.


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