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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
[TOPICS: MAUDS$,M$U$$$]

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