Steel Products Prices North America

Industrial Production & Manufacturing Capacity Utilization

September 17, 2013

Both these data points are reported in the Federal Reserve G17 data base. The IP index (industrial production) was reported as 99.36 for August, up from 98.96 in July. This was an increase of 0.4 percent and moved the 3MMA up by 0.17 percent. Growth of the 3MMA was 2.0 percent year over year reversing a three month slide. The IP index in August was the highest since March 2008 (Figure 1). This is still the least up-beat of the manufacturing indicators so its reversal is a welcome sign.

Manufacturing capacity utilization was 76.13 percent in August up from 75.73 percent in July. The 3MMA rose from 75.92 to 75.99 percent which is the same as it was in April last year (Figure 2).

Every three months, the Manufacturers Alliance for Productivity and Innovation (MAPI) provides a detailed look at the health of the domestic manufacturing sector and reviews the performance of a selected group of its most important subsectors. The September 10th report covers the actual data available through July 2013. Manufacturing industrial production declined at a 0.8 annual rate in the second quarter of 2013 and fell at a 1 percent annual rate in July. The decline in manufacturing activity was a correction for the exceptionally strong pace of production in the first quarter (5.2 percent annual rate) and not a precursor of a general slump. Manufacturing simply got ahead of the sluggish performance of the overall economy and went through an adjustment period to realign orders and production.

Reports from the Institute for Supply Management’s Purchasing Managers Index in July and August suggest that production has already staged a strong rebound. Acceleration in manufacturing production during the second half of this year is expected, but nothing in the outlook suggests more than a return to moderate growth. The outlook for 2014 and 2015 calls for close to a percentage point improvement in the growth rate each year.

Consumer spending growth has remained remarkably stable because of surprisingly robust employment growth in a sluggish economy. Thankfully, the payroll tax increase is in the rearview mirror, and spending will accelerate in 2014. Households have low debt burdens and their wealth position is rising. Businesses are well positioned for new investments in structures and equipment. Firms have low debt, are profitable, and have relatively high utilization rates. What is needed is more confidence about the future. With the Eurozone coming out of recession, export activity should pick up and provide a boost to business sentiment.

Government austerity, particularly at the federal level, is a necessary drag on economic growth. The forecast assumes there will not be a federal government shutdown and/or a debt ceiling crisis in October. And there is not yet another round of large, across-the-board discretionary federal spending cuts ahead for 2014. MAPI forecasts that manufacturing production will increase 2.2 percent in 2013, 3.2 percent in 2014, and 4.1 percent in 2015. High-tech production is forecast to increase 5.2 percent in 2013, 7.6 percent in 2014, and 8.9 percent in 2015. Non-high-tech or traditional manufacturing, which accounts for the vast bulk of value-added in the sector, will grow 2.1 percent in 2013, 3.1 percent in 2014, and 4.0 percent in 2015.

In the National Association of Manufacturers third quarter survey, respondent’s optimism increased. Over the course of the next 12 months, respondents expect their sales to grow 3.3 percent on average, up from 2.7 percent in June. While this suggests improvement over the course of this year—particularly from December’s survey when businesses were worried about the fiscal cliff—it also indicates that growth remains less than robust, especially when compared to the beginning of 2012. Capital spending, exports, and employment expectations edged higher. However, hiring still lags behind, with roughly 60 percent of businesses not planning to add to their workforce.

Overall, 76.1 percent of those taking the survey were either somewhat or very positive about their own company’s outlook. This increased from 72.3 percent three months ago but still fell well below the 88.7 percent experienced in March 2012. In a series of special questions, manufacturers made clear that they continue to worry about the long-term health of the nation. Nearly 85 percent want policymakers to permanently address our deficit and debt challenges over the next 12 to 18 months. They also want the President and Congress to slow the growth of entitlements (74.5 percent) and pass comprehensive tax reform (66.2 percent). At the same time, respondents cited the rising cost of health care as their top primary business challenge right now. With continuing uncertainties related to implementation of the Affordable Care Act, health care has been the top concern for three straight quarters.

SMU comment: manufacturing will consume an estimated 51 million tons of steel in the US in 2013 and is by far the largest steel consuming sector, followed by construction at 22 million tons. The slow but steady advance of the manufacturing indicators is good news for a similar performance of steel consumption.