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This article is written by PNC Chief Economist Gus Faucher.
- Industrial production rose 0.5% in April, after no growth in the two previous months.
- Output is basically flat over the past year.
- Higher interest rates will be a drag on the industrial sector this year, with a recession leading to a decline in output in the second half of 2023. Output should start to recover in 2024.
Industrial production rose 0.5% in April from March, after holding flat in February and March. Industrial production was up 1.0% in January, but declined late last year, and so output is roughly equal to where it was in mid-2022.
Manufacturing output rose a solid 1.0% in April, with mining output up 0.6%. Utilities output fell 3.1% in April due to unseasonably cool weather.
On a year-ago basis overall industrial production was up a scant 0.2%, with manufacturing output down around 1%, mining output up almost 6%, and utilities output down slightly.
The capacity utilization rate rose to 79.7% in April from 79.4% in March, with the manufacturing rate rising to 78.3% from 77.6%. The capacity utilization rate is down from mid-2022; this, along with easing supply chains, has contributed to much slower goods inflation this year compared to last.
The industrial sector is stagnant. Mining output soared in 2022 following the Russian invasion of Ukraine and spiking energy prices but has been flat since the fall. Manufacturing output is down from mid-2022 as high interest rates and spent-up demand for goods, after consumer goods purchases soured during the early stages of the pandemic, have been a drag. The ISM manufacturing index indicates a small contraction in that sector this year.
PNC expects a drop in industrial production, particularly in interest-rate sensitive segments like durable consumer and business investment goods, as the U.S. economy experiences a mild recession starting in the second half of this year. Production should start to turn around in the first half of 2024 as the Federal Reserve cuts interest rates in response to slowing inflation and a deteriorating labor market.
One positive in the report was a 9.3% increase in output of motor vehicles and parts in April from March, despite high interest rates, as supply-chain problems continue to recede in the industry.
About the author: Prior to joining PNC in December 2011, Faucher worked for 10 years at Moody’s Analytics, where he was a director and senior economist. Previously, he worked for six years at the U.S. Treasury Department, and taught at the University of Illinois at Urbana-Champaign. He serves on the board of directors of The Economic Club of Pittsburgh - the local chapter of National Association of Business Economics (NABE). He is also co-chair of the Financial Roundtable of NABE. Faucher earned a Ph.D. in economics from the University of Pennsylvania and a B. A. in economics from Cornell University.
