Manufacturing and mining output fell
Energy and utilities boosted industrial demand.
Industrial production rose 0.4% in March, beating expectations for a 0.2% increase. The headline increase was a head fake due to a surge in utility output brought about by harsher, colder weather. Both manufacturing and mining output, which collectively account for 90% of overall industrial output, declined by 0.5% each in March.
The inhospitable weather in March drove up energy demand. Natural gas output jumped 16.5% while electricity rose 7%. Absent the surge in utility output, industrial production would have fallen 0.4% instead in March.
The manufacturing sector is clearly losing momentum amid weakening goods demand and tighter credit conditions. Output of motor vehicles and parts fell 1.5%, wiping out the collective gain of the prior two months. Supply chain disruptions due to chip shortages have largely been resolved. More recently, labor shortages in the supplier network have contributed hurdles to ramping up. Credit conditions are also tightening, which will hit both suppliers and demand. Lower affordability from higher financing rates is likely to crimp future consumer demand for big-ticket purchases such as cars and SUVs and trigger a larger contraction in business investment.
Brace for a bumpy summer with more losses in the pipeline
Activity associated with the housing sector, which is in recession, declined sharply in March. Wood product output fell 2.9% while furniture production declined 1.3%. On an annual basis, wood product output plunged 9.7%, the weakest since 2019 when it fell the same amount. Any lower and it would have been the deepest loss since the Great Recession.
The weaker readings in manufacturing output do not come as a surprise as they had been telegraphed by the slide in the manufacturing Purchasing Managers Index (PMI). The PMI production index has been below 50 in the last four months, signaling that manufacturers are experiencing lower activity.
Production of business equipment posted back-to-back decreases of 1% and 0.5% in March and February, respectively. Capital spending plans were softer in the latest durable goods orders report, which suggests further output cuts over the coming months.
Bottom Line:
The manufacturing sector continues to lose ground. Higher interest rates, tightening credit conditions and souring business sentiment are forcing businesses to cut output. On an annual basis, manufacturing output has posted losses in two of the last four months, -1.1% in both March and December. Brace for a bumpy summer with more losses in the pipeline.
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