Economy

Ahead of the Fed Rate Hike, Industrial Production and Capacity Utilization Feel Recessionary

Jon C. Ogg

Published: December 16, 2015 11:40 am

Last Updated: January 13, 2020 4:01 pm

The markets may be handily awaiting the Federal Reserve’s decision on interest rates at 2:00 p.m. Eastern Time on Wednesday, but the Fed released its reading on industrial production and capacity utilization for the month of November ahead of the decision. Unfortunately, these numbers are looking recessionary, if you only looked at the industrial side of this equation in an economy that is now goods and services oriented.

Industrial production fell by 0.6% in November, after decreasing 0.4% in October. Bloomberg was looking for a drop of only 0.2%. Also worth noting was that the October reading of -0.4% was a revision from the preliminary reading of -0.2%.

The index for utilities was -4.3%, as unusually warm weather held down the demand for heating. The index for mining was -1.1% in November, which was highly attributable to sizable declines for coal mining and for oil and gas well drilling and servicing. At 106.5% of its 2012 average, total industrial production in November was 1.2% below its year-earlier level.

Where the Federal Reserve’s report gets even uglier is in the capacity utilization for the industrial sector. It was down by 0.5 points to 77.0%. October’s utilization rate was 77.5%, and Bloomberg was calling for the November consensus at 77.4%.

The Fed signaled that capacity is now 3.1 percentage points below its long-run average, which measures the years 1972 to 2014. A closer look on capacity was even worse than the bad headline may show, stated as follows:

The capacity utilization rate for manufacturing edged down to 76.2 percent, a rate 2.3 percentage points below its long-run average. The operating rate for durable goods manufacturing moved down 0.3 percentage point, while the operating rate for nondurable goods manufacturing moved up 0.4 percentage point. Utilization for other manufacturing (publishing and logging) decreased 0.9 percentage point. The operating rate for mines dropped 1.1 percentage points to 79.4 percent, while capacity utilization for utilities fell 3.4 percentage points to 74.5 percent.

What matters here going into the election is that politicians keep calling for industries to return less to shareholders and invest more in their future with new factories. The simple truth is that companies are not going to want to reinvest in new factories and make massive new hires when they are utilizing only 77% of capacity — it needs to be more like 80% (or expected to be soon) before CEOs and executives will want to start investing again.

This economic recovery has not had capacity hit 80.0% once. The high was 79.0%, seen in November and December of 2014.