Implications: The surprisingly strong increase in industrial production in December was largely powered by a 4.2% increase in utility output, a function of unusually cold weather on the East Coast. However, manufacturing still expanded a robust 0.4% in December, the sixth consecutive increase. Moreover that 0.4% gain in manufacturing came with no help from the auto sector, which reduced production slightly. The recent negative trend for auto production will not continue. Auto sales were up substantially in 2010 and are likely to continue to improve in 2011. That's why analysts are already forecasting a hefty increase in activity at automakers in the first quarter. In mid-2009, capacity utilization was at a 45-year low of 68.2%. Now, only 18 months later, capacity utilization is almost 8 percentage points higher, at 76%. Two factors are boosting utilization: expanding output and a depreciating capital stock. In fact, because of depreciation, total capacity (the ability to produce) in manufacturing has fallen back down to 2007 levels. We expect capacity utilization to climb to near the long-term average of 80% by later this year, compelling companies to accelerate investment in plant and equipment.
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Posted on Friday, January 14, 2011 @ 12:25 PM
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