The recovery in the U.S. manufacturing sector is continuing: The output of U.S. factories, mines and utilities rose 0.8% in November -- the biggest industrial output gain in three months -- the U.S. Federal Reserve announced Tuesday. Further, it was a broad-based gain, with all groups and sectors except for utilities registering increases after a generally disappointing October.
Meanwhile, the factory utilization rate, also known as capacity utilization, rose to 71.3% in November from a revised 70.6% in both October and September. The capacity utilization rate is 9.6 percentage points below its average for 1972-2008, the Fed said; still lower than where utilization should be, but nevertheless better than the level recorded in October.
The consensus of economists surveyed by Bloomberg News had been that industrial production would increase 0.6% and capacity utilization would rise to 71.2 in November. It was flat in October, with capacity utilization totaling 70.6%. Industrial production also rose 0.6% in September, with the capacity utilization rate climbing to 70.6%.
Broad-based Industrial Gains
In November, U.S. industrial production registered healthy gains nearly across the board: Construction activity increased 1.6%, materials rose 1.3%, non-industrial supplies increased 1.0%, business equipment rose 0.4%, final products rose 0.4%, and consumer products increased 0.3%. By group, mining activity increased 2.1% and manufacturing rose 1.1%; however, utilities sector activity fell 1.8%.
Investors should pay attention to industrial production and capacity utilization data because although manufacturing accounts for less than 20% of U.S. GDP, it accounts for most of the nation's cyclical growth. A pattern of declines in production points to a softening economy; rising industrial production signifies the reverse. A low capacity-utilization rate usually reflects softer demand, while a high rate suggests stronger demand, with the potential for increased inflation.
One key to the U.S. manufacturing sector's rebound lies in the growth of high-end/tech-intensive manufacturing: the production of items such as solar panels, windmill turbines, commercial airplanes and smart devices. That's because many jobs in low-end manufacturing have shifted to lower-cost labor centers outside the United States and are unlikely to return, most economists agree.
Industrial production's impressive monthly growth supports the thesis of those who see the economy in recovery. The industrial dimension of the U.S. economy is gaining momentum. Further, given lean inventories and decent demand, activity at the nation's factories, mines, and utilities should continue to increase in the quarters ahead -- a bullish sign for U.S. GDP, corporate earnings, and, by extension, for U.S. stock markets.
However, investors should keep the recent industrial gains in perspective: The nation is coming off its worst recession since World War II, with an enormous decline in industrial output, and a loss of more than 7.6 million jobs. Hence, while the industrial growth is encouraging, it will be the condition of the job market in the quarters ahead that will be the key determinant of demand in 2010, and, by extension, of 2010 U.S. GDP.
Take the first steps to building your portfolio.View Course »