Economy

Industrial Production and Capacity Utilization Reach Alarming Levels

Jon C. Ogg

Published: April 15, 2016 11:25 am

Last Updated: January 13, 2020 10:43 am

Friday’s deluge of economic reports included a rather grim view on both industrial production and capacity utilization in the month of March. Some of the economic readings have looked better in late-month data for March, so this one seems a bit of a surprise. What really hurts here is that industrial production went into the red.

There is also a bit of a reality check in here when it comes to politics. Capacity utilization is back to being so low that politicians are just not going to be able to shame companies into building new factories and new centers to conduct their services. They can’t come close to maximizing the capacity they already have mothballed.

A report from the Federal Reserve showed that industrial production decreased at a rate of −0.6% in March — for a second month in a row. Bloomberg was calling for a mere drop of 0.1%. February’s reading also was revised lower to −0.6% from a preliminary −0.5% reading.

For the first quarter as a whole, industrial production fell at an annual rate of 2.2%. The Fed indicated that a substantial portion of the overall decrease in March resulted from declines in the indexes for mining and utilities. Mining was −2.9% and utilities were −1.2%. Manufacturing output was also a drag with production at −0.3%.

The Fed report said:

The sizable decrease in mining production continued the industry’s recent downward trajectory; the index has fallen in each of the past seven months, at an average pace of 1.6 percent per month. At 103.4 percent of its 2012 average, total industrial production in March was 2.0 percent below its year-earlier level.

Where things look really weak is the capacity utilization for the month of March. The industrial sector’s capacity use was down by 0.5 percentage points in March to a reading of 74.8%. This is not just a level that is —5.2 points versus the historic norm. It was the worst reading since the 74.6% reported for November 2010, and also the first time since then that the reading dipped below the 75% mark. Bloomberg was calling for a reading of 75.4%, with its Econoday range being 75.0% to 76.9%.

Manufacturing capacity barely remained above 75% at 75.1%, with mining and utilities being the big drag here at 73.7%. Maybe much of this can be blamed on commodities demand and pricing. Still, the manufacturing figures looked dismal as well.

Until capacity utilization rates get closer to 80%, calling for companies to build new plants and centers is probably a non-starter. Directionally speaking, these levels just are not bringing great hope for big upward adjustments to gross domestic product.