MNI 5 Things:Downside Risk To US Industrial Production Rebound

By Sara Haire and Holly Stokes

     WASHINGTON (MNI) - The Industrial Production report for February will be

released Friday, with the median forecast among analysts in an MNI survey

calling for a 0.4% gain in industrial production and capacity utilization to see

a rise to 77.8%.   

     Ahead of the release, we outline five themes for particular attention.

--HISTORY OF OVERESTIMATING IP

     Analysts are expecting a 0.4% rise in February for industrial production.

In the last 20 years, analysts have overestimated industrial production for 11

of the past 20 reports. The absolute average miss for the last twenty years has

been 0.28pp, and when they overestimate their average miss is slightly less than

when they underestimate (0.28pp vs 0.31pp). This trend of overestimating has

only solidified recently, with analysts overestimating seven times in the last

10 years, including the most recent three years. Analysts' average overestimate

in the last ten years has risen to 0.33pp. This could lend itself to a downside

risk if analysts have continued their tendency to overestimate. 

--WARMER WEATHER TO DAMPEN UTILITIES

     Utilities have provided a considerable boost to industrial production in

the past few months, but this streak is likely to come to an end with this

month's report. There was an unusual warm spell during February throughout the

US, which could translate into a drag on utilities as home heating fell in the

month according to the PPI report released Wednesday.  In the past few months,

electric and gas utilities in industrial production have been tracking closely

to the change in PPI home heating oil. If it continues along the same trend,

utilities will follow suit and post a decline from the previous month. 

--ANALYSTS LOOK FOR MINING TO RECOVER

     Last month analysts were surprised when mining plummeted 1.0%, after they

had initially pencilled in a rise based on high crude oil prices and a climbing

rig count. Given that it was this large decline that pulled down overall

industrial production, analysts are now watching February mining with a keen

eye. Again, analysts are hopeful for a positive print based off of rising rig

counts, with Baker Hughes announcing that the U.S. average rig count increased

by 32 from January.  EIA data for natural gas and crude oil also point to a

potential rebound. However, the misinterpretation of last month's industry data

puts a bit more uncertainty on whether mining will manage to lead the rebound

for industrial production, especially as some analysts base their overall

forecast on an expected 2% surge for mining.

--DOWNSIDE RISK TO CAPACITY UTILIZATION

     Analysts expect capacity utilization to increase to 77.8%, but there is a

downside risk given analysts' track record of overestimating February capacity

utilization. In the past 10 years, the median estimate in MNI surveys has

overestimated capacity utilization six times - with three of those occurring in

the most recent years. Comparatively, they have only underestimated three times

in the 10 years. If analysts manage to break from this trend and a 77.8% print

is realized, this would be the highest capacity utilization since February 2015.

While this would signal a modest reduction in economic slack, it would still be

well below the 80% threshold of pre-recession highs, and leave plenty of room

for the economy to absorb increased productivity without overheating - one of

the last signals FOMC participants will see before heading into the March

meeting.

--MANUFACTURING TO FOLLOW HOURS WORKED UPSWING

     Manufacturing is set to rebound after two months of flat readings.

Month/month percent change in manufacturing hours worked and month/month percent

change in IP manufacturing typically follow the same trend. The already released

February Employment Situation report shows that manufacturing hours worked

increased by 0.5% in the month, indicating that IP manufacturing should also

post a gain. Further, the last time that manufacturing hours rose by this

magnitude was in October 2017, when IP manufacturing month/month surged by 1.3%

- suggesting that February IP manufacturing may provide a significant boost to

the overall index. 

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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