U.S. Industrial Production Surges amid Cheap Energy

Industrial production surged to its highest level since 2010 in November after three solid months of gains.  Industrial production rose 5.2% year-over-year in November and manufacturing rose 4.8% year-over-year, signaling continued confidence in the economy from the industrial sector.

Industrial production surged to its highest level since 2010 in November after three solid months of gains.  Industrial production rose 5.2% year-over-year in November and manufacturing rose 4.8% year-over-year, signaling continued confidence in the economy from the industrial sector.

The gains came as energy prices began a steep decline. WTI oil futures have fallen 29.7% in the same period as U.S. industrial production rose. The strongest gains in November were from utilities (5.1% growth) and manufacturing (1.1% growth), suggesting that cheaper oil is driving greater productivity from U.S. producers, who have struggled with flat or declining growth since 2009.

The rise in industrial production brings economic growth to its highest level since May 2010, according to figures from the Federal Reserve. Meanwhile, the Fed said that it was revising upwards its growth estimates from June to October, citing “widespread gains among industries”. The only industry groups that declined were information processing, non-NAICS manufacturing, and mining, which all lost 0.1%. Natural gas surged at 6.9% growth and motor vehicles saw 5.1% growth.

Capacity Utilization Signals Economic Strength

Capacity utilization for all industries rose to 80.1% from 79.3% in October and 79.5% in September. The highest capacity utilization rates were in petroleum and coal products, mining, and electrical equipment.

Capacity utilization is a key indicator for demand, as it measures the ratio of total output relative to total possible output for manufacturers. The strong production of energy products, for instance, is a significant sign that falling oil prices are not a result from waning demand in the United States, but from higher production both domestically and abroad.

The lowest capacity utilization was in nonmetallic mineral products, non-NAIC manufacturing, and semiconductors. However, there was no significant change in production from these sectors in November, suggesting no secular trend.

Homebuilders Upbeat

Rising industrial productivity on the expectation of greater consumer demand met homebuilders’ continued confidence in the demand for new houses. The National Association of Home Builders Wells Fargo index fell one point to 57 in December, but remains at a nine-year high as the demand for new homes remains steady. 

“We are in a slow march back to normal. As we head into 2015, the housing market should continue to recover at a steady, gradual pace,” said NAHB Chief Economist David Crowe.

Homebuilders may be receiving some help from mortgage rates, which fell in 2014 as U.S. Treasury yields declined.  This helps to encourage hesitant buyers into the market. Meanwhile, Freddie Mac and the Federal Housing Finance Agency have hinted that banks should and will loosen credit further for homebuyers. Mortgage rates for thirty-year loans fell to 3.93% in the week ending December 11, according to Freddie Mac.

At the same time, housing inventories and home prices have not seen as strong growth as in 2013, leading Toll Brothers CEO Douglas Yearly to call the year “a bit frustrating and confusing” for homebuilders.