U.S. factories record biggest decline since the end of WW II
Apr 15th 2009 1:30PM
Updated Dec 4th 2009 12:59PM
These are some scary low U.S. factory numbers. Output at U.S. factories declined 1.5 percent in March, the U.S. Federal Reserve announced Wednesday, as the nation's industrial sector continued to contract amid what is rapidly becoming the United State's worst recession since World War II.
Further, factory utilization fell one percentage point to 69.3 percent -- the lowest level for that metric since the Fed began tracking the statistic in 1967.
Output declines for 14th month in 15
Equally stunning, industrial output has fallen in 14 of the past 15 months, as factories trim unwanted stockpiles and reduce production, due to slack demand stemming from the U.S. and global recessions.
Economists surveyed by Bloomberg News had expected March factory production to fall 0.8 percent and the utilization rate to decline to 70 percent. In February, factory production fell 1.4 percent and the utilization rate was at 70.9 percent.
What's more, during the past 12 months factory output has plummeted 15 percent, and 15.7 percent during the recession that started in December 2007. The 15.7 drop is the largest decline since 1945-46, when World War II ended. Excluding vehicles, industrial production declined 1.9 percent in March.
Zach Pandl, economist for Nomura Securities International in New York said some green shoots may be sprouting in the U.S. economy, but don't look for a wonderful spring growing season.
"Businesses look like they are still quite uncertain about the outlook for the economy," Pandl told Bloomberg News Wednesday. "These production cuts are still necessary because inventories are still bloated."
In March, mining output fell 3.2 percent; utilities fell 1.8 percent; business equipment, 2.8 percent; consumer goods, 0.3 percent.
Investors should pay attention to industrial production and capacity utilization data because although manufacturing accounts for less than 20 percent of U.S. GDP, it accounts for most of the nation's cyclical growth. Continual declines in production point to a softening economy; rising, the reverse. A low capacity utilization rate usually reflects softer demand; a high rate, strong demand, with the potential for increased price pressure.
Economic Analysis: Typically, another factory output decline would provide fodder for stock market bears and trigger a U.S. stock market sell-off. However, at mid-day, the Dow was virtually unchanged, basically shrugging off the report. That suggests that traders have already discounted long-term changes to the U.S. manufacturing sector: they sense that some of the output decline is not a "real" loss because the production is not recoverable, due to the likely transfer of certain industrial tasks overseas to lower-cost markets.
With the above structural changes in mind, the March factory output report does underscore the need for the United States to identify and create new, value-added industrial and tech sectors (renewable energy, information technology, infrastructure, quality-of-life fields) to make up for the industrial output and jobs lost to globalization. Those new sectors must appear for the United States to remain a strong, versatile, and prosperous nation with ample economic opportunities.