Is This a Major Setback for the U.S. Economy?

After having posted two solid months of gains in November and December, industrial production edged down 0.1 percent in January, the Federal Reserve reported on Friday. This drop came alongside a 0.4 percent dip in United States manufacturing output.

Ahead of the report, analysts polled by Bloomberg had expected the index to rise 0.2 percent to follow December’s gain of 0.4 percent. But manufacturing, which represents 75 percent of the total production, fell and brought down the entire index. Comparatively, revised data for November and December showed the biggest two-month gain since 1984.

The Federal Reserve’s monthly index of industrial production, along with the related capacity indexes and capacity utilization rates, cover manufacturing, mining, and electric and gas utilities. Together with construction, the industrial sector accounts for the majority of the variations in national output over the course of the business cycle, and therefore these measurements provide an important reading of the health of the economy…
With 2007 set as the base year, the production index expresses the current level of industrial output in relation to previous output. In order to give a more complete view of the U.S. economy, the Fed also compiles the capacity index, an approximation of the nation’s potential output, and the rate of capacity utilization. For the month of January, capacity utilization fell to 79.1 percent from December’s four-year high of 79.3 percent.

Both automobile production and mining output, major industry groups that make up the production index, suffered last month. Mining production, which includes oil drilling, fell 1 percent, while the output of motor vehicles and parts decreased 3.2 percent, after increasing 2.9 percent in the previous month. Yet automobiles are still expected to drive economic growth this year; auto sales in the last three months were the strongest the United States has seen in five years, with cars and light trucks selling at an annual rate of 15.2 million in January.

With increases in consumer and business spending coming in late 2012, this year was given a stable foundation for increased industrial production. But at the same time, the higher income and payroll taxes that are cutting into American paychecks and the possibility of across-the-board federal spending cuts could hamper production gains in 2013…
“Manufacturing will advance slowly this year as long as demand keeps growing and nothing knocks the economy off course,” RBS Securities economist Guy Berger told Bloomberg before the report was released. In addition, “markets like China and Latin America will help to keep a floor under U.S. exports,” he added.

There is evidence that Berger may be correct. A second report issued by the Federal Reserve showed that the general economic index climbed to 10, its highest level since last May and a massive jump from January’s reading of minus 7.8.

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