Industrial Production and Capacity Utilization Reveals Soft Supply

By TJ Kim

September 17, 2012

Along with the soft readings from the ISM, Industrial Production and Capacity released last Friday by the Federal Reserve reported that production had slowed down.

Declines in Industrial Production and Capacity were broad-based across manufacturing, mining and utility. After four months of upward trends, the August Industrial Production contracted by 1.2% in a month over month basis, below the consensus that expected no change from July. Economics research analyst from Barclays wrote in Instant Insights.

“Declines were spread across all major components. By market group, there was weakness in consumer goods (-1.2%), business equipment (-0.2%), and materials (-1.5%). By industry group, the largest declines were within durable goods (-1.1%). The drop in vehicles output was accompanied by weakness in machinery (-0.8%), furniture (-1.6%), and electronics (-0.7%). Meanwhile, non-durable goods output was down 0.2%.”

Moreover, a decline in Industrial Production brought down Capacity Utilization at 78.2%, marking 1.0% decline from July. As with Industrial Production, August’s Capacity Utilization does not bode well for third quarter economic growth. Coupled with the rising Producer Price Index, under-utilized capacity alarms the private sector as it rests on fragile consumption and commodity/energy prices.

Despite the unwelcomed news from the supply side, equity market did not plunge but instead soared upon the FOMC announcement on the third round of Quantitative Easing. In return, the benchmark 10-yr U.S. Treasury yield edged up to 1.86%.

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