October Industrial Production

Updated 19-Nov-09 19:26 ET

Highlights

Industrial production in October posted a mini disappointment. Production continued its recent upward trend, but growth moderated to only 0.1% after increasing by 0.6% in September. The consensus projected production to increase by 0.4%.
The decline in production numbers could have been worse. The positive increase in production was due to unseasonably cold weather in the beginning of October which pushed up utility production by 1.6%.
Manufacturing production posted a 0.1% decline after growing by 0.8% in September.
Capacity utilization picked up slightly from 70.5% to 70.7%. In October 2008, capacity utilization was 75.4%.
As with the production numbers, the increase in capacity utilization was not from manufacturing but from utilities. Manufacturing capacity utilization held steady at 67.6% while utility utilization rose from 77.9% to 79.0%.
Within the manufacturing sector, all three stage-of-process groups posted minimal increases in capacity utilization. The crude stage increased from 83.0% to 83.1%. The primary and semifinished stage rose from 67.3% to 67.4% and the finished group increased from 69.4% to 69.5%.

The drop in manufacturing was unexpected.
Production in motor vehicles was expected to stabilize as dealers welcomed 2010 model cars onto lots. However, manufacturers must be worried about low future orders as production stalled in October. Total auto and light truck assemblies fell from 7.15 million units to 6.83 million. Total motor vehicle production including parts declined 1.7% after posting a strong 8.1% gain.
Excluding the auto sector, manufacturing production posted no growth as consumer goods production increased 0.4% and mitigated declines in business equipment (-0.3%), construction supplies (-1.2%), and business supplies (-0.3%).
It is worrisome that manufacturing production was so reliant on consumer goods. Production has increased for the past three months but shipments and orders in manufactured goods have lagged. Eventually, orders will need to pick up or production growth will become unsustainable.
We still believe manufacturing production will stay on a moderately positive trend through 2010, but the sharp spike in production that was expected through the end of 2009 seems unlikely.

Production held up surprisingly well through most of 2008 due in part to strong exports. Exports grew at a 7.0% annual rate in 2005, 9.1% in 2006, 8.4% in 2007, and at an annual average rate of 7.8% through the first three quarters of 2008. Then, the bottom fell out in the fourth quarter as the financial crisis spilled over to the real economy at home and abroad, severly impacting global trade and end demand that led to declining levels of industrial production and capacity utilization. The near-term trend is expected to improve as financial markets, and global economies, have stabilized.

Category	OCT	SEP	AUG	JUL	JUN
Industrial Production
Total Index	0.1%	0.6%	1.3%	0.9%	-0.4%
Manufacturing	-0.1%	0.8%	1.4%	1.2%	-0.3%
Utilities	1.6%	-0.2%	0.8%	-1.2%	-0.5%
Mining	-0.2%	0.6%	1.1%	1.4%	-1.4%
Capacity Utilization
Total Industry	70.7%	70.5%	70.0%	69.0%	68.3%
Manufacturing	67.6%	67.6%	67.0%	66.0%	65.1%