Manufacturing Mixed in March

The Federal Reserve’s G.17 report showed that industrial production edged up 0.1 percent in March and increased at an annual rate of 7.8 percent in 1Q2010. Manufacturing output rose 0.9 percent in March, led by widespread gains among durable goods industries. Although perhaps held down by February’s winter storms, 1Q2010 factory production as a whole rose at an annual rate of 6.6 percent. At 101.6 percent of its 2002 average, industrial output in March was 4.0 percent above its year-earlier level. Output from individual forest products industries was mixed in March: Wood Products advanced, while Paper retreated.

Capacity utilization for total industry advanced 0.2 percentage point to 73.2 percent, 5.3 percent above the rate from a year earlier. As with industrial production, capacity utilization among forest products manufacturers was mixed – Wood Products ran harder in March, while slack increased among Paper manufacturers. Capacity utilization increased in all-industry and Wood Products because of increased output and the shuttering of additional capacity.

Capacity utilization is a key statistic the Federal Reserve uses to indicate the degree of economic slack and the risk of price instability. The majority of the all-industries capacity utilization improvement since mid-year 2009 has been the result of higher production rather than reduced capacity. Capacity utilization remains well below “normal” levels at present; based on that metric alone, it seems unlikely the Federal Reserve will raise interest rates anytime soon. However, we believe market conditions will force interest rates higher. Should this scenario unfold, capacity utilization may ultimately come back into balance primarily through capacity losses instead of increased production. Aggressively leveraging competitive advantage will be a key to success in such a future.