Industrial Production Gains Momentum

Industrial production in the U.S. rose 0.7 percent in February, after having been relatively unchanged in January, according to the U.S. Federal Reserve. Last month’s increase marked the strongest performance in three months and exceeded projections. On a year-over-year basis, industrial output was 2.5 percent above the level for February 2012 and remained close to its pre-recession average.

While experts had predicted production would climb last month, the size of the gain came as a surprise, as economists polled by Reuters forecast a 0.4 percent rise in February.

Manufacturing output, which accounts for roughly 12 percent of the U.S. economy and represents three-quarters of total industrial production, increased 0.8 percent in February, following a 0.3 percent decline in January. As of last month, the Federal Reserve’s measure of factory output is at its highest level in four and a half years.

“Business investment and lean inventories are spurring gains in output at companies such as Texas Instruments Inc. that will help propel growth,” Bloomberg News reports. “The pickup may enable the world’s largest economy to cope with across-the-board federal spending cuts, a payroll-tax increase and higher gasoline prices that are shaking household confidence.”

Much of the February gain in manufacturing output was due to a significant pickup in automotive production, which climbed 3.6 percent following a 4.9 percent drop in January. After hitting a five-year peak in 2012, car sales have continued to climb through the first few months of this year.

Meanwhile, business equipment production rose 2.5 percent in February after having fallen 1.3 percent in January, led by a 4.7 percent gain in transit equipment and a 2.2 percent rise in industrial equipment output.

The production indexes for wood products, nonmetallic mineral products, fabricated metal products, machinery, and furniture and related products all posted gains of between 1.6 percent and 2 percent last month, with the only major decline in primary metals, which fell 2.6 percent.

Apart from the manufacturing sector, utilities output increased 1.6 percent in February, as temperatures returned to seasonal norms following two months of unseasonably warm weather. However, mining production fell 0.3 percent, the third consecutive month of decline.

At 99.5 percent of its 2007 average, total industrial production in February stood at a healthy level. Capacity utilization, which measures how much of the country’s industrial production capabilities are in use, also picked up last month, climbing to 79.6 percent from 79.2 in January. The utilization rate remains 0.6 percentage points below the 1972-2012 long-run average.

“Running near full capacity could lead to higher prices for manufactured goods, economists caution, and could push up inflation. But for now, a separate report Friday showed that consumer prices, outside gas, remained tame in February,” the Associated Press reports. “Increasing factory output is contributing to an improved outlook for the economy this year. Americans are spending more, despite higher Social Security taxes and a sharp increase in gas prices. Retail sales rose in February at a healthy pace.”

Despite these positive signs, many manufacturers remain vulnerable to mounting financial instability and political uncertainty, which are already driving down U.S. consumer sentiment and could negatively affect demand and output in the near-term future.

“The robust manufacturing growth in February should be read with some caution,” according to Yingying Xu, an economist for the Manufacturers Alliance for Productivity and Innovation (MAPI). “In large part it reflects improved consumer spending and the rebound in business equipment investment from January, which can both be volatile and easily impacted by the uncertainties of headwinds from the sequestration and the still highly uncertain path of government policy change.”