Industrial production surged in January

Industrial sector is on strong footing, despite cooling demand for goods

Industrial production jumped by 1.4% in January, outpacing market projections of 0.5%. The better-than-expected increase was driven predominately by a surge in utilities production stemming from cold January temperatures. The production of utilities generally does not reveal much about the underlying momentum in industrial manufacturing, as it is a volatile, weather-dependent component of the index.

A more telling barometer of health in the industrial sector is the manufacturing index, which rose by 0.2%. The modest increase in manufacturing suggests conditions in the industrial sector may be cooling but should remain solid in the first half of 2022.

The demand for goods may be easing, but that’s not troubling

The modest increase of 0.1 percentage points in capacity utilization in the manufacturing sector, coupled with easing demand for manufactured products, as evidenced by the decline in the ISM new orders index, suggests that the strong demand for goods may be slowing. However, we expect the economy will continue to grow at a faster rate than what was experienced at the end of the last cycle when annual growth hovered around 2.5%. The relatively higher rate of economic expansion should translate into solid conditions in the manufacturing sector in 2022.

Supply chain issues still plaguing motor vehicle production

Production of motor vehicles and parts declined for a second straight month, signaling that the sector continues to struggle with supply chain-related issues. As outlined in our recent chartbook, we expect supply chain disruptions to continue to hold back production this year. Short supply, low inventories, and another expected summer surge in vehicle demand, suggests that inflationary pressures are likely to persist.

Key Takeaways:

• The stronger-than-expected January jump in industrial production was driven by a surge in utilities production and shouldn’t be seen as a strengthening of the underlying fundamentals in the manufacturing sector.
• Supply chain disruptions continue to weigh on vehicle production, which could translate into additional inflationary pressures if demand for cars and trucks jumps again this summer.
• The manufacturing sector weathered the Omicron surge better than expected, and while demand for manufacturing products is cooling, conditions in the sector should remain solid over the first half of 2022.