But Big Jump in Manufacturing Output Is Good News

• Industrial production was flat in January, but the details were good, with big increases for manufacturing and mining.
• Industrial production declined at the end of 2022 but has picked up in early 2023.
• PNC expects a recession later this year, due to higher interest rates, and a decline in industrial production.

While industrial production was flat in January from December, the details were much better. Manufacturing output rose a strong 1.0% over the month, the biggest increase since February 2022, after declines in November and December. Mining output jumped 2.0%, the largest increase since March 2022, after declines in November and December and no growth in October. 

There was a large drop in utilities output in January of 10% with warmer than usual weather, weighing on topline growth. But the big increases in manufacturing and mining output in January, after weakness at the end of 2022, point to continued resilience in the US economy and a pickup in economic activity in early 2023. 

Although industrial production was solid in January, excluding weather-related softness in utilities, the outlook is not as good. Higher interest rates will weigh on demand for consumer durable and business investment goods as the Federal Reserve continues to raise rates to slow inflation. Oil prices have been flat for the past few months and are down by more than one-third from their peak in the summer of 2022 following the Russian invasion of Ukraine, and natural gas prices are down even more sharply with a warmer-than-usual winter; this will weigh on mining output in the near term. 

PNC expects a US recession in the second half of 2023 as the drag from higher interest rates weighs on economic activity, with a corresponding decline in industrial production. 

The overall capacity utilization rate fell to 78.3% in January from 78.4% in December and is down from 79.9% in September. But the manufacturing rate rose in January from December, although it is down by 1.5 percentage points from the early fall (79.2% in October to 77.7% in January). Both the overall and manufacturing capacity utilization rates are at levels that indicate little goods inflation. For the Federal Reserve, the bigger concern is inflation in the services sector, caused by strong wage growth. 

Output of motor vehicles and parts rose 0.5% in January from December, but that followed big declines in November and December as supply chains remain a problem. That being said, output in the industry is close to where it was prior to the pandemic.