Friday, February 18, 2011

Manufacturing Still in Good Shape

This week, we've had three important reports on manufacturing -- industrial production, the New York Fed's Empire State Manufacturing Survey and the Philly Fed's Manufacturing Survey. Let's examine the details of each.

From the Fed:

Industrial production decreased 0.1 percent in January 2011 after having risen 1.2 percent in December. In the manufacturing sector, output increased 0.3 percent in January after an upwardly revised gain of 0.9 percent in December. Excluding motor vehicles and parts, factory production rose 0.1 percent in January. The output of utilities fell 1.6 percent in January, as temperatures moved closer to normal after unseasonably cold weather boosted the demand for heating in December; the output of utilities advanced 4.1 percent in that month. In January, the output of mines declined 0.7 percent. At 95.1 percent of its 2007 average, total industrial production in January was 5.2 percent above its level of a year earlier. The capacity utilization rate for total industry edged down to 76.1 percent, a rate 4.4 percentage points below its average from 1972 to 2010.

The above highlights the importance of details in the overall report. While IP did decline, the output in utilities was the primary reason for the decrease. Notice that utilities increased at a strong rate (4.1%) in the preceding month, making last months decrease more pronounced.

Before we look at the details, let's take a look at the chart of the overall number:

Notice overall IP has been increasing for the better part of two years.

Let's look at the details:
Manufacturing output rose 0.3 percent in January after having increased 0.9 percent in December; the level of output in January was 5.5 percent above its year-earlier level. Capacity utilization for manufacturing was 73.7 percent, a rate 5.4 percentage points below its average for the period from 1972 to 2010.

The output of durable goods moved up 0.6 percent in January. A large gain was recorded in the index for motor vehicles and parts; smaller increases were recorded for many other industries, including fabricated metal products, machinery, computer and electronic products, aerospace and miscellaneous transportation equipment, furniture and related products, and miscellaneous manufacturing. Output decreased for wood products; nonmetallic mineral products; primary metals; and electrical equipment, appliances, and components.

Nondurable manufacturing declined 0.1 percent in January after having advanced 1.0 percent in December. The decline in production in January reflected decreases for food, beverage, and tobacco products; textile and product mills; printing and support products; and petroleum and coal products. The production of apparel and leather products moved up more than 1 percent, and the output indexes for paper, for chemicals, and for plastics and rubber products recorded smaller increases. The index for non-NAICS manufacturing industries, which comprises publishing and logging, rose 0.3 percent.

In January, mining output fell 0.7 percent, and capacity utilization declined to 88.1 percent, a rate 0.7 percentage point above its 1972-2010 average. After a sizable increase in December, the output of utilities dropped 1.6 percent in January, as production declined in both electric and natural gas utilities. The utilization rate for utilities fell to 81.2 percent.

Durables manufacturing increased broadly, including an increase in auto production. This increase indicates two points: first, end users are growing more confident because durable goods require financing to make purchases, and second, financing is becoming more available as these types of purchases usually require some type of credit facility. Both of these developments indicate fundamental economic strength. Here is a five-year chart of the data:

Notice the durables manufacturing is clearly in an uptrend, increasing on a month to month basis.

The .1% decline in non-durables manufacturing occurred after a 1% increase in December. While the decline was fairly broad-based, covering a wide range of industries, the overall decline was shallow, indicating it was probably as much a simple slackening of demand after a strong increase the previous month. Here is a chart of the data:

Notice the overall uptrend that is clearly in place.

Finally, we have mining, which appears to have topped over the last 5 months:

However, the overall output is now at levels above those preceding the recession, indicating this area of IP has recovered.

Again, note the latest report from the Federal Reserve on Industrial Production fell, but that decline was largely utility related. A look at the underlying data indicates the strong uptrends are still intact.

Let's turn to the Empire State Index:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve in February. The general business conditions index rose 3.5 points to 15.4. The new orders index edged down just slightly, to 11.8. The shipments index retreated 14 points, reversing much of January's 18-point surge, but remained positive at 11.3. The inventories index continued to climb from its December low, reaching its highest level since April. The index for number of employees fell, but the average workweek measure moved up. The prices paid index climbed to a two-and-a half-year high in February, but the measure for prices received was little changed, suggesting some pressure on profit margins. The forward-looking indexes continued to signal widespread optimism, though to a somewhat lesser degree than in January. Indexes for expected prices, both paid and received, declined moderately, after reaching multiyear highs last month.

Several months ago, this number dropped into negative territory. However, it has clearly rebounded and again printing good numbers. Here is a chart of the data:

Finally, we have the Philadelphia Fed:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 19.3 in January to 35.9 this month. This is the highest reading since January 2004 (see Chart). The demand for manufactured goods is showing continued strength: Although the new orders index was virtually unchanged in February, it has increased over the past six months. The shipments index also improved markedly, increasing 22 points. Firms also reported a rise in unfilled orders and longer delivery times this month.

Firms’ responses continue to indicate improving labor market conditions. The current employment index increased 6 points, and for the sixth consecutive month, the percentage of firms reporting an increase in employment (29 percent) is higher than the percentage reporting a decline (5 percent). More than twice as many firms reported a longer workweek (23 percent) than reported a shorter one (10 percent).

Notice this is the highest reading since 2004, indicating this region has clearly bounced back from the recession and is doing better than in the previous expansion.

The data indicates that manufacturing -- a backbone of the current recovery -- is still doing well.