Industrial production flexes its muscles
Utility output soared when Midwestern temperatures plunged.
January 16, 2026
December industrial production increased 0.4%, surpassing market expectations for a 0.1% rise. November output was revised upward to 0.4% from 0.2%. Two of the three main industry groups contributed to December's strength. Manufacturing output rose 0.2%, instead of the 0.1% drop expected. Utility output grew at a faster 2.6% due to heating needs as the Midwest experienced bitterly cold temperatures early in the month. Mining output declined 0.7%, led by a 4.3% drop in coal output and oil and gas extraction falling 0.1%. Oil prices remain too low to justify additional drilling.
In manufacturing, the output of durable goods rose 0.1% while nondurables increased 0.3%. Within durables, primary metal output rose 2.4%, the largest increase in six months. The output of electrical equipment, appliances and components rose 1.7%, owing to data center construction. Aerospace and transportation equipment rose 1.5%, 17.2% for the year, the fastest pace among all industries. Improved production flow at a key aerospace supplier raised output to the highest since 2018. This is a sector that had been a major drag and now is a tailwind for manufacturing activity.
The expiration of federal tax credits for electric vehicles at the end of September took a toll on motor vehicle and parts production for the fourth consecutive month. Output declined 1.1% for the month and fell 2.2% compared to a year ago. This is the same time that vehicle producers absorbed much of the blow of tariffs in profit margins. Manufacturing employment hit a wall in April and fell consistently from May through December.
Wood products output declined 2.3%, the fourth consecutive drop. On an annual basis, output fell 5.5%, which is the sharpest drop among all industries. Ongoing affordability issues continue to limit activity in the residential housing market, while lumber tariffs are boosting the cost of new construction.
In nondurables, food, beverage and tobacco output rose 0.5%; plastics and rubber products increased 0.3%.
We see the Federal Reserve on hold in the first half of the year before resuming rate cuts in June.
Ken Kim
KPMG Senior Economist
Bottom Line:
Industrial output grew 2.2% annually in the fourth quarter of 2025, the best reading since 2022, which follows full year contractions in 2023 and 2024. While we see the Federal Reserve on hold in the first half of the year before resuming rate cuts in June, there are other factors that are supportive for the manufacturing sector in this new year. The resumption of 100% bonus depreciation, which offsets the cost of tariffs on equipment purchases, tax cuts for households which free up disposable income and the heavy work of supply chain adjustments by manufacturers should buoy gains at the start of the year. The challenge is whether those gains will show up as a commensurate bump in employment, which has thus far been lacking.
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