August Industrial Production and Capacity Take a Dive

Industrial production and capacity utilization for the month of August is out. The question to ask is whether today’s industrial production report even matters. After the QE3 announcement was targeted at the hope of boosting jobs and keeping mortgage rates low, it was not really any secret that this number was not expected to be strong.

The reading for August showed that industrial production was down by a sharp -1.2% and capacity utilization was 78.2%. Bloomberg had estimates of -0.1% in production and 79.2% in capacity utilization. Hurricane Isaac was blamed for -0.3% of the drop, but this was the biggest drop in about three years.

Today’s report compares to prior reports of a 0.6% gain in July, which was revised to only +0.5% this morning and a 0.1% gain in June. Those months had been boosted by manufacturing and by automotive. The July capacity utilization was initially reported as being 79.4%.

A known problem with today’s reading was that we already saw that wholesale inventories were up and wholesale sales were down. Unless businesses absolutely know with a 90% probability that the fourth quarter is going to get much better, the stage was set for a slowing down of capacity and production.

The Federal Reserve’s monthly index of industrial production and the related capacity indexes and capacity utilization rates cover manufacturing, mining, and electric and gas utilities.

One thing that has stood out over and over during this entire weak recovery process. The world is full of excess capacity to produce more on a moment’s notice. Demand just hasn’t been there.

JON C. OGG