Implications: Ignore the headline that says "industrial production was flat in October." Mild weather cut utility output by 3.4%, which offset a robust 0.6% gain in factory production – the largest gain in three months and the fourth consecutive increase. Including upward revisions to prior months, factory output was 0.9% above the previous estimate for September. In the past six months, manufacturing output is up at a 4.9% annual rate, while non-auto production is up at a 3.8% rate. Although capacity utilization in the industrial sector is at 74.8% -- versus a long-term average of 80% -- capacity use is well above the low of 68.2% at the bottom of the recession in mid-2009. Two factors are boosting utilization: expanding output and a depreciating capital stock. In fact, manufacturing capacity has fallen back down to 2007 levels. Even with increases in business investment, our forecast of roughly 4% real GDP growth in 2011 should push capacity utilization back to the long-term average of 80% next year. This trend will force companies to expand capacity, which they clearly have the incentive to do. Record levels of cash remain on corporate balance sheets, earning virtually nothing.
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Posted on Tuesday, November 16, 2010 @ 1:59 PM
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