Analysis from Daniel J. Meckstroth, Ph.D., vice president and chief economist at the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation, regarding the December 2015 industrial production report.
“The Federal Reserve reports that industrial production fell 0.4% in December following a 0.9% decline in November,” noted Meckstroth. “While this sounds severe, the industrial makeup of the downturn is important. Manufacturing production posted only a 0.1% decline in December and although the change in production was revised down slightly for November to -0.1%, it was revised up for the months of September and October. The reason for the sharp decline in fourth quarter 2015 industrial production is due to energy production, not manufacturing. Utility production fell 2.0% and mining industry production contracted 0.8% in December. It is noteworthy that the weather-driven utility production decline did not result in layoffs; utility employment increased in December and throughout last year. For the year as a whole, manufacturing production increased 2% in 2015 versus 2014 and was up 0.8% in December 2015 from December 2014."
“The December industrial production report should allay fears that the manufacturing sector is in recession. Manufacturing production expanded at a 3.2% annual rate in the third quarter of 2015 and at a 0.5% annual rate in the fourth quarter,” he added. “Yes, there is a slowdown, but manufacturing is not in a recession. December manufacturing production was up in 10 of the 20 major industries. An important point is that the gains and losses were not concentrated in any one industry. A major driver of growth is the ramping up of the construction supply chain. Both residential and commercial and industrial construction are strong and public works construction is expanding at a modest pace. Wood products, nonmetallic mineral products, fabricated metal products, electrical equipment and appliances, and textile product mill production are all construction materials and components and all posted growth in December."
“The steep decline in energy production is a major depressing force that affected machinery, basic chemicals, metals, and many other industries to a lesser extent,” Meckstroth concluded. “A strong and appreciating dollar is another major headwind in the manufacturing sector. But what temporarily depressed the fourth quarter is an inventory correction. We believe that inventories are sorting out so the mild winter weather and solid consumer spending in the overall economy will demand moderate growth in manufacturing production in 2016.”