Implications: Overall industrial production has been ugly over the past year, and today's 0.6% decline in November does not make it any better. But like most of the past year, the decline in November was due to utilities and mining, neither of which we believe will stay persistently weak in the years ahead. Utility output dropped 4.3% in November as temperatures in the lower 48 states were unseasonably warm due to the El Niño effect. Meanwhile, given oil price declines in the past year, mining continues to be a headwind for the economy, dropping 1.1% in November, with much of the decline attributable to sizable declines for coal mining and oil and gas well drilling and servicing. However, declines in drilling and extraction shouldn't last much longer. Based on other commodity prices, oil prices should average at higher levels over the next several years. Meanwhile, productivity gains in energy production from new technologies continue to drive down costs. Taking out mining and utilities gives us manufacturing which was unchanged in November and up 1.0% in the past year. Auto production was a drag in November, declining 0.9% but manufacturing was up 0.1% excluding autos. The fundamentals favor a recovery in overall industrial production in the year ahead. Mining and utilities should rebound, monetary policy remains relatively loose, and companies are sitting on huge cash reserves while corporate cash flow is at a record high. We don't expect production to boom any time soon, as a strengthening dollar along with weaker overseas demand will continue to be a headwind, but we do expect a gradual pick-up in activity in 2016.
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Posted on Wednesday, December 16, 2015 @ 10:22 AM
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