Industrial Production Was Flat In January

Industrial production was basically unchanged last month, the Federal Reserve reports. Economists were expecting a substantial rise and so today’s update was a negative surprise. Is that a sign of trouble for the economy? No, not really, at least not yet. Industrial production alone isn’t all that valuable as a forward-looking measure of the business cycle, although it does tend to confirm other warning signs when recession risk is rising. By that standard, there’s not much going on here since the annual pace of industrial production is still growing at a healthy clip. If you’re looking for a smoking gun that tells us the economy’s set to tumble, you won’t find it here. Sure, it could be the start of something worrisome, but it might just as easily turn out to be noise, and so the net result at the moment is that today’s data point is more or less a wash.

Even after last month’s flat performance, industrial production rose 3.4% over the past 12 months. As the chart below shows, that’s a fairly high rate relative to the pre-recession economy. It’s down from post-recession rebound rates of 2010, but those elevations weren’t sustainable once the economy moved closer to something approximating normality.

Meanwhile, even though industrial production overall was flat, there was growth in certain sectors, notably: business equipment-related manufacturing, which popped 1.8% last month, building on a strong 1.4% rise in December. This was offset in construction and materials sectors, and a slight dip in consumer-related production. Then again, one month doesn’t mean much—rather, it’s the trend that’s crucial, and as the chart above reminds there’s nothing particularly problematic in the numbers on that score. Growth, in short, is still the path of least resistance.
As David Sloan of IFR Economics explains via Reuters:

January industrial production with an unchanged headline fell well short of expectations for a 0.7% increase, but the disappointing headline conceals positive details in the breakdown. Manufacturing saw a healthy 0.7% increase, though over half of this came from autos, with the overall number restrained by weakness in utilities (-2.5%, a second straight steep fall due to a mild winter) and a less easy to explain 1.8% fall in mining. What are however most notable are unusually sharp upward back month revisions. December is now seen as up 1.0% rather than 0.4% with December manufacturing output up 1.5% rather than 0.9%. With November also revised up December’s net revisions total +0.8% for overall industrial production and +0.7% for manufacturing. Despite the weaker than expected headline, this report is showing a significant recent acceleration in manufacturing output.