Production Stall Continues as Utility Output Falls, Producer Prices Flat
- Industrial Production for October was unchanged as utility output fell.
- The Producer Price Index for final demand was also unchanged in October.
Industrial production for October was unchanged after dipping slightly through August and September. Manufacturing output increased by 0.2 percent for the month. Mining output gained 2.1 percent, consistent with moderate gains in the drilling rig count. Utility output fell by 2.6 percent. The headline industrial production index levelled out in 2016 after sliding through 2015 with reduced oil field activity. The reset in energy markets has also spilled over into the manufacturing sector as reduced oil field activity means reduced demand for equipment and products. As of October, the headline index remains 2.3 percent below its November 2014 peak. With stabilizing oil prices and ongoing improvements to drilling efficiency, which are reducing marginal costs of production in key U.S. oil fields, we expect to see more support for the industrial production index from the energy sector going forward. However, modest gains from the energy sector may be offset by reduced production in the auto sector. U.S. auto sales appear to be peaking and U.S. nameplates are moving small car production to Mexico. So we do not expect to see resurgence in U.S. manufacturing activity in 2017. Piling on, the strong dollar also represents a headwind for U.S. manufacturing, likely through next year. A key focus of the incoming Trump administration is to support U.S. manufacturing through the renegotiation of trade deals and by labelling China as a currency manipulator. Trump has called for tariffs on Chinese goods and for U.S. trade officials to take action against China through the World Trade Organization. He has also criticized U.S. companies for moving production to Mexico, including U.S. automakers. So there is upside risk to our expectation of ongoing flattish industrial production if the Trump administration is able to take meaningful steps quickly.
The Producer Price Index for final demand was unchanged in October. On the goods side, increases in energy prices were muted by declining food prices. On the services side, declines in trade and other service prices reduced the services sub-index for the month. Over the previous 12 months the PPI for final demand was up by 0.8 percent. Excluding food, energy and trade, it was up by 1.6 percent over the year. We expect to see consistent year-over-year gains in the PPI going forward.
Market Reaction: Equity markets opened with losses. The yield on 10-Year Treasury bonds is down to 2.22 percent. NYMEX crude oil is down to $45.59/barrel. Natural gas futures are up to $2.92/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Industrial Production 11-16-16.