Industrial production rises in March

Industrial Production Surges in March

The industrial sector went on a tear in the first quarter of the year, as evidenced by the Federal Reserve’s latest industrial production report. The headline industrial production index rose 0.9% from February to March, climbing much higher than the consensus expectation of a 0.4% gain. The index has now risen nearly 1% in each of the last three months. Gains were broad-based and some industries hardest hit by supply chain disruptions, like automobile manufacturing and motor vehicles and parts production, showed strong growth.

The March release also indicates that activity in the industrial sector has yet to be materially impacted by the Russia-Ukraine war. Manufacturing capacity utilization is now above long-run averages, which suggests some moderation in production in the months ahead. Yet, due to significant industry tailwinds, we expect solid growth in both the headline and manufacturing indexes to continue throughout the second quarter.

Don’t stop believing

So far, the surge in commodity prices has not weighed on manufacturing production. The subindex for the manufacturing sector (which constitutes nearly 75% of the overall index) is up 4.9% over the last year. Notably, the automobile manufacturing sector showed remarkable strength given continued supply chain disruption, with vehicle and parts production jumping 7.8% in March, and up 3.9% year over year. Such increases indicate that supply chain issues may be easing.

Despite the current strength of the manufacturing sector, we anticipate some easing inactivity in the second quarter. A surge in capacity utilization and continued labor shortages signal that the sector is already operating a high level and may not be able to service current elevated levels of demand. Additionally, the ISM new orders and backlog of new orders indexes both declined in March, signaling that production is likely to ease in coming months.

The use of contracts when selling goods and purchasing inputs has likely muted the initial impact from the Russia-Ukraine war but it’s possible the sector has not yet felt the full impact. Still, the potential reshoring of production in some industries and relatively low cost of capital signals that the sector will maintain its strength in the second quarter.

Three key takeaways from the March numbers:

1. The industrial sector is on strong-footing and so far, has avoided significant impact from the Russia-Ukraine war.
2. Surging monthly growth in vehicle and parts productions signals that supply chain disruptions may be alleviating for the automobile manufacturing industry.
3. The manufacturing sector had a robust first quarter, but some easing in demand is expected.