Manufacturing Sector Shakes of Winter Blues, Economic Prospects Improve

Source: Twitter @tim_cook

Source: Twitter @tim_cook

After the weather-induced slowdown experienced in recent months, industrial production rose sharply in February as factory activity strengthened, increases that suggested the economy is once again finding its stride after a difficult winter. In fact, the results were unexpectedly strong; output at at factories, mines, and utilities increased a seasonally adjusted 0.6 percent following January’s 0.3 percent decline, the report from Federal Reserve stated Monday. Plus, factory production rose by the most in six months. “This is going to be the start of the rebound,” TD Securities U.S. strategist Gennadiy Goldberg told Bloomberg before the report. “Pent-up demand should start to drive things as we get further into the spring.”

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January’s decline — the largest drop recorded since 2009 — followed a strong last quarter for the manufacturing sector. Through 2013, the focus was on the American consumer and the affect consumer spending — or lack there of — would have on the American economic recovery. But there was increasing evidence that the manufacturing sector was helping the economic recovery find its legs as well. Throughout the final three months of the past year, industrial output increased at 6.8 percent annual rate, making the quarter the strongest since the April through June period of 2010. But January’s unusually cold weather caused some mining operations to slow and put the brakes on factory output, as snowstorms in the eastern part of the country prevented some plants from receiving parts and materials — although utility consumption did increase thanks to the frigid temperatures. While Capital Economics senior U.S. economist Paul Dales noted at the time that manufacturing output typically recovers quickly from temporary factors, he cautioned that, “With the weather having been just as severe in February … this may not happen until March.”

But with February’s report, it appears that the manufacturing sector was in better shape going into March than previously expected. Of course, stronger demand from consumers and companies will further help strengthen the manufacturing sector, where companies are faced with built-up inventories. Factory stockpiles rose consistently last year because production outstripped demand. By January, inventories of durable goods — or manufactured products expected to last three years or longer — hit a record level. When too many goods pile up, manufacturing companies typically lower output, meaning the consumption of goods, a gauge of consumer and business spending, is essential to a recovery in manufacturing.

Industrial production can be analyzed with respect to two criteria: major market groups and major industry groups. The market groups category is divided into several subdivisions including consumer goods, business equipment, and construction, which give analysts a better picture on how well each of these specific areas of the economy are performing. In February, production of consumer goods rose 0.8 percent, putting the index 2.6 percent higher than February 2013’s level. In addition, the output of business equipment increased 1.3 percent after showing little change over the preceding four months. It was the biggest increase posted in a year. Contributing to that gain, the indices for transportation and industrial equipment, which had been the principal contributors to the slower pace of business equipment growth during those months, advanced 2.0 percent and 1.6 percent in February, respectively. The construction numbers were still slightly positive, even though home-builder confidence plunged in February, a signal that builders are generally pessimistic about sales trends. The production of construction supplies index advanced 0.2 percent last month, putting the index 3.2 percent above its year-earlier level.

As for industrial production, the Federal Reserve’s index is broken down into three major industry groups: manufacturing, mining, and utilities. The index and all of its components are pegged to a 2007 level of 100. The most watched segment is manufacturing, which rose 0.8 percent on the month to 97.2, nearly entirely reversing January’s 0.9 percent decline. “Much of the swing in the rates of change for production in January and February reflected the depressing effects on output of the severe weather in January and the subsequent return to more normal levels of production in February,” the report stated. The level of factory output was 1.5 percent above its year-earlier level, while capacity utilization for manufacturing rose 0.5 percentage point in February to 76.4 percent, a rate 2.3 percentage points below its long-run average.

Within manufacturing, the production of durable consumer goods rose 0.9 percent in February, an increase led by solid increases in the indexes for automotive vehicles and product and smaller gains for machinery and fabricated metal products. Auto assemblies increased in February to an 11.4 million annual pace from 10.6 million rate a month earlier. Production losses of about 1 percent or more were registered for several categories including electrical equipment, appliances, and components as well as  furniture and related products. Meanwhile, the output of non-durable materials rose 0.7 percent last month after falling 1.1 percent in January, with gains propelled by increases in the indices for food, beverage, and tobacco products and for apparel and leather.

“Manufacturers are becoming more optimistic about the impending rebound in economic activity, suggesting improving prospects for economic growth after weather-inspired first-quarter weakness,” TD Securities economist Gennadiy Goldberg told Reuters.

In general, the goods producing sector acts as a bellwether for the broader economy, helping to inform investors about the economic backdrop against which they are making decisions. With this in mind, overall manufacturing conditions improved steadily since the final months of last year, with the exception of January. Monday’s data from the Federal Reserve joined other recent reports in suggesting manufacturing activity is expanding. The Institute for Supply Management’s purchasing managers index for the manufacturing sector recorded a reading of 53.2 in February, a 1.9 point-increase that partially made up for a sizable decrease last month. The Federal Reserve Bank of New York’s “Empire State” general economic index rose to 5.6 in March from last month’s 4.5, as new orders picked up. Still, the Department of Labor’s February Employment Situation Report showed that employment in manufacturing and mining changed little over the month, despite the general pickup in hiring.

Capacity utilization — a measure of slackness in the economy — rose to a 78.8 percent pace in February from 78.5 percent the prior month, according to the Federal Reserve’s report.

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“U.S. factories seemed to make up for lost time. This provides some hope that we are beginning to move past the period of weather-impacted activity,” BMO Capital Markets senior economist Jennifer Lee told Reuters. Just as the manufacturing report indicated the economy has shock off the vestiges of the winter slowdown, so too did the February retail sales report from the Department of Commerce and last month’s Employment Situation Report.

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