Including Huge Increase for Autos; Supply Chain Woes Are Fading

• Industrial production rose 0.9% in March and is now above its high during the previous expansion.
• Output rose in manufacturing, with an especially big jump in motor vehicles and parts.
• Mining output is rising steadily as producers respond to higher energy prices.
• Increasing output should help reducing inflationary pressures this year.

Industrial production rose 0.9% in March from February and is now above its August 2018 peak during the previous expansion. Growth was 0.9% in February (revised up from 0.5%) and 1.0% in January (revised down from 1.4%). Output increased 8.1% at an annualized rate from the fourth quarter of 2021 to the first quarter of 2022, an indication that supply chain disruptions are easing.

Manufacturing output rose 0.9% over the month, including a huge 7.8% increase for motor vehicles and parts. This followed a 4.6% decline for motor vehicles and parts in February. Shortages of computer chips have disrupted auto production during the recovery from the pandemic, but the automakers are developing workarounds. Mining output increased 1.7% over the month and is up by almost 8% over the past seven months, as producers increase production in response to higher energy prices. Utilities output increased 0.4% in March.

On a year-ago basis industrial production growth in March was 5.5%. This consisted of increases of 4.9% for manufacturing, 7.0% for mining, and 7.5% for utilities.

The capacity utilization rate rose to 78.3% in March from 77.7% in February, with the manufacturing rate increasing to 78.7% from 78.1%. Normally capacity utilization rates well below 80% would indicate few inflationary pressures in the economy, but the current high inflation is due to multiple factors, including strong demand for some goods and services coming out of the pandemic, shortages of key materials, rising labor costs, and now higher energy costs in the wake of the Russian invasion of Ukraine.

Industrial production is now fully recovered from a period of softness in 2019, and then a plunge during the pandemic. IP fell 17% in March and April 2020 as the pandemic came to the U.S., but has steadily improved since, even with supply chain disruptions. Growth has accelerated in recent months as business have had more success in getting inputs and have increased output.

This should help slow inflation for manufactured goods, which has been one contributor to higher overall inflation during the recovery from the pandemic. But other factors are also contributing to high inflation, including the tight labor market and Russia-Ukraine, and so the economy’s inflation woes are not over yet. A gradual tightening in monetary policy from the Federal Reserve should also contribute to softer economic growth and a slowing in overall inflation over the next couple of years.

There was a huge increase in output of motor vehicles and parts in March, following a big drop in February. It is too soon to tell if the industry is out of the woods yet, but PNC expects stronger auto production and sales through the rest of this year and into 2023.

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