Energy shock drags on industrial output

April 16, 2026

March industrial production fell 0.5%, missing expectations for a 0.1% rise. That was the largest drop since September 2024. February was revised upward to 0.7% from 0.2%, ameliorating some of the negative impact from March. In the first quarter, industrial output grew at a 2.4% annual rate, the fastest pace in a year.

All three key components of industrial output suffered losses in March. Utility output declined 2.3% with both electric and natural gas output falling 2.3%. More mild weather after an unusually hatch January and February, along with efforts to conserve in wake of the Iran war, may have led industries to economize on energy usage. Mining output fell 1.2%; manufacturing output slipped 0.1%.

The softness in manufacturing output was anticipated due to reports of weaker auto assembly rates. Output of motor vehicles and parts fell 3.7%, the largest drop in six months. That is despite a surge in vehicle sales with tax refunds starting to hit consumer bank accounts during the month. Tariffs and dollar depreciation last year gave an advantage to foreign producers over some domestic producers for much of last year.

Furniture production fell 1.4% as early signs point to another bust for the spring selling season due to ongoing affordability issues in the housing sector. Mortgage rates have backed up about half a percentage point to 6.50% since the start of the war with rising Treasury yields. Bond market participants are concerned about higher future inflation from the oil price shock. Smaller losses appeared in primary metal output, down 0.6%, and machinery output, off 0.3%.

Industries connected to data centers and aerospace racked up further gains. Electrical equipment output rose 1.1% while computers and electronic products grew 0.8%. Aerospace output advanced 1% as a major commercial aircraft builder returned to full utilization rates. Aerospace output grew 6.2% year-on-year, the fastest pace among all industries and even outpacing the 5.5% growth for computers and electronic products.

The Fed could hike interest rates in the second half of 2026 to keep inflation at bay.

Ken Kim

KPMG Senior Economist

The near-term outlook for the industrial sector is highly dependent upon events in the Middle East. Energy remains a key input for the manufacturing sector. While crude oil, diesel and other energy-related prices have come down from their peaks, they remain elevated. Should a ceasefire hold, the impact could be limited. The Federal Reserve could potentially ease monetary policy several months from now. In an alternative scenario in which oil prices remain near $100 into summer, the first quarter expansion could end up being the best quarter for the year. That would be compounded by the possibility that the Fed could hike interest rates in the second half of 2026 to keep inflation at bay.