MNI: 5 Things To Look For: US Industrial Production Report

By Holly Stokes and Sara Haire

WASHINGTON (MNI) - The G.17 Industrial Production and Capacity Utilization

report will be released Thursday, with the median forecast among analysts in an

MNI survey calling for a 0.2% gain in industrial production and capacity

utilization expected to see a rise to 78.0%.   

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

--RECENT TREND OF OVERESTIMATING

In the past 20 years, analysts have overestimated January industrial production

12 times and underestimated it six times. This tendency to overestimate is even

stronger in the past 10 years, overestimating it seven times with only two

underestimates. With analysts' estimates varying from a decline of 0.3% to a

gain of 0.6%, the track record would suggest a downside risk to the median

estimate of a 0.2% gain and give more likelihood to the forecasts on the lower

range.  

--UTILITIES UNLIKELY TO RISE

Analysts are divided on expectations for utilities - arguing whether or not the

January cold front will create another strong gain even after December's 5.6%

surge. However, a second strong gain in utilities after a surge of December's

magnitude is unprecedented. Since the series start in 1939, there have been only

five gains as strong as December's. All of these gains were then followed by

either declines or a very soft gain, typically exhibiting a mean reverting

tendency. If January utilities follow trend, utilities could act as a strong

drag. However, within the utilities sector, natural gas could see an increase

due to a high demand during this unseasonably cold January.

--MANUFACTURING OUTPUT PREDICTED TO DECLINE

In the past year, barring the hurricane noise, the ISM manufacturing production

index and industrial production manufacturing output have followed the same

trend. ISM manufacturing production saw a decline in January to 64.5%,

suggesting industrial production manufacturing output should also see a decline.

In addition to this, average weekly hours for the manufacturing sector saw a

decline in the January employment report to 40.6 from 40.8, affirming the view

that the manufacturing output of tomorrow's report should see a decline.

However, some analysts are citing the 15k gain in factory payrolls as a reason

to be optimistic about the sector. That being said, there is no direct

correlation between the two measures. In four of the last nine Januarys, the

reports show that the month over month percentage changes in the industrial

production manufacturing output sector and manufacturing payrolls move in

opposite directions.

--ANALYSTS HISTORICALLY OVERESTIMATE CAPACITY UTILIZATION

MNI calculations and survey history show a tendency for analysts to overestimate

capacity utilization. In the past 20 years, January capacity utilization has

been overestimated 12 times and only underestimated two times. This trend has

continued in more recent history, with six of the past 10 Januaries being

overestimated and two underestimated. Additionally, in the past 10 years, the

average analyst overestimate at 0.33pp is greater than the average analyst

underestimate of 0.25pp. This would suggest a slight downside risk to the median

estimate of 78.0, and perhaps help alleviate market concerns of uncontrollable

inflation as capacity utilization stays below the 80% threshold of pre-recession

highs.

--GROWING RIG COUNT SUGGESTS MINING UP

Amidst January crude oil prices growing to $70/barrel, a 30-year high, drillers

were likely enticed to boost production. Baker Hughes reports that January's

U.S. average rig count climbed by 7 to 937, and up 254 from January of last

year. Accordingly, several analysts expect mining to post its fifth consecutive

monthly gain, and help lift industrial production. This would follow the 12.7%

annualized advance in the fourth quarter, which rebounded considerably after

being held down by hurricanes in the third quarter. With expectations for rig

counts to continue to climb in the year, continuing the upward trend since the

lows seen in 2016, January and the first quarter look set to continue the strong

mining advances.

--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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