Industrial production increased 0.5% in February from January, the third increase in the last four months. After falling 17% in March and April 2020 as the pandemic came to the U.S., industrial production has steadily recovered and is now slightly above its pre-pandemic level. However, output is still slightly below its previous cyclical peak, in September 2018. Industrial production increased an unrevised 1.4% in January from December.

Manufacturing output increased 1.2% in February from a month earlier, after essentially flat output in the previous two months. There were solid increases in production for both durable and nondurable goods in February. However, output of autos and parts fell 3.5% over the month, as shortages of inputs, most notably computer chips, continue to constrain the industry despite strong demand. Mining output rose 0.1% over the month, following an increase of 1.3% in January. Utilities output fell almost 3% in February with a return to more seasonable weather; utilities output soared more than 10% in January with colder-than-usual temperatures.

The capacity utilization rate rose to 77.6% in February from 77.3% in January; the manufacturing rate rose by 0.1 percentage point over the month to 78.6%. Normally a capacity utilization rate well below 80% would restrain inflationary pressures in the economy. But with shortages of many inputs and the tight labor market, inflation in late 2021 and early 2022 is running far above the Federal Reserve’s 2% objective. The capacity utilization rate was around 76% before the pandemic and then plunged to 63% in April 2020. It has steadily risen since then. 

The industrial sector recovery continues, but supply-chain problems are still a drag, particularly in the auto industry. Firms are developing workarounds, but a full recovery in manufacturing won’t come until later this year. In the near term, industrial production will get a lift from increased energy output as firms expand capacity in the wake of higher oil prices following the Russian invasion of Ukraine. The number of active oil and gas rotary rigs in the U.S. has more than doubled since bottoming out in mid-2020, although it is still below its pre-pandemic level. Industrial production should surpass its 2018 peak in the second half of this year.

Small drop in initial UI claims, levels in five decades 

Initial claims for unemployment insurance fell to 215,000 in the week ending March 12, down from 229,000 the previous week (revised higher from 227,000). The four-week moving average of claims, which smooths out some of the volatility, fell to 223,000 in the week ending March 12, down from 232,000. Initial claims for unemployment rose in early 2022 to close to 300,000 as the omicron variant hit the labor market, but more recently have returned to around 200,000 per week. This is where initial claims stood before the pandemic and is just slightly higher than their current recovery low in late 2021.

Initial claims jumped to more than 6 million in April of 2020 as the pandemic came to the U.S. They then fell quickly to around 900,000 per week by early August 2020, then stabilized at between 700,000 and 900,000 between August 2020 and March 2021. Claims fell gradually but steadily in the spring of 2021 before stabilizing at around 400,000 per week, and then started to decline again in August 2021, with an especially large decline in the second half of November. At the end of 2021 they settled in at around 200,000 per week.

The total number of people receiving benefits under regular state unemployment insurance programs (continued claims) fell by 71,000 in the week ending March 5 at 1.419 million; claims for the previous week were revised slightly lower. This is the lowest level of continued claims since 1971. The four-week moving average of continued claims fell to 1.463 million, a decline from 1.506 million the previous week. This was the lowest level for the four-week moving average since 1970. The four-week moving average of continued claims has fallen every week but two since late May 2021. Continued claims are at decades-long lows as unemployed workers leave the program’s rolls, either because their benefits have expired or because they have quickly found a new job. After peaking at more than 23 million in May 2020, state continued claims have now moved to their lowest levels since the early 1970s.

The labor market remains in excellent shape in the first quarter of 2022. Demand for labor is very strong, and with the labor force smaller than it was before the pandemic, firms are competing for workers and bidding up wages. Employment increased by an average of almost 600,000 per month in the three months through February, well above the pre-pandemic pace of around 150,000 per month. Total employment fell by 22 million in March and April 2020 as the pandemic hit the U.S. labor market and since then the economy has added back around 20 million of those jobs. The U.S. should return to its pre-pandemic level of employment over the summer. The unemployment rate, which peaked at almost 15% in April 2020, was 3.8% in February. It should return to its pre-pandemic level of 3.5% later this year.

The Federal Open Market Committee raised the fed funds rate by a quarter of a percentage point March 16, the first in what is expected to be a series of rate increases. The FOMC wants to raise interest rates gradually over the next couple of years to slow economic growth enough to bring down inflation, which is much higher than the committee would like, but not by enough to push the economy into recession. This task has been exacerbated by the Russian invasion of Ukraine, which has added to inflationary pressures but is also going to weigh on U.S. economic growth. The central bank has a difficult task ahead of itself but is more likely than not to successfully complete it.