US industrial output down 0.1% in January, contrasts with expected gain; flat over past 12 months; US Treasury yields fall modestly; rate-cut expectations largely unchanged; capacity utilisation rate declines to 78.5%, 0.6ppts below long-term average.
The Federal Reserve’s industrial production (IP) index measures real output from manufacturing, mining, electricity and gas company facilities located in the United States. These sectors are thought to be sensitive to consumer demand and so some leading indicators of GDP use industrial production figures as a component. US production collapsed through March and April of 2020 before recovering the ground lost over the fifteen months to July 2021. However, production growth has largely stagnated since early 2022.
According to the Federal Reserve, US industrial production contracted by 0.1% on a seasonally adjusted basis in January. The decline contrasted with the consensus expectations of a 0.4% rise and it was under December’s flat result after it was revised down from 0.1%. On an annual basis the growth slowed from December’s revised figure of 1.2% to zero.
The figures were released on the same day as the latest retail sales figures and US Treasury yields fell modestly. By the close of business, the 2-year Treasury yield had slipped 1bp to 4.57%, the 10-year yield had lost 2bps to 4.24% while the 30-year yield finished 3bps lower at 4.41%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months remained largely unchanged, with several cuts factored in. At the close of business, contracts implied the effective federal funds rate would average 5.315% in March, slightly below the current spot rate, 5.305% in April and 5.22% in May. February 2025 contracts implied 4.21%, 112bps less than the current rate.
The same report includes capacity utilisation figures which are generally accepted as an indicator of future investment expenditure and/or inflationary pressures. Capacity usage hit a high for the last business cycle in early 2019 before it began a downtrend which ended with April 2020’s multi-decade low of 64.2%. January’s reading fell from December’s upwardly-revised figure of 78.7% to 78.5%, 0.6 percentage points below the long-term average of 80.1%.
While the US utilisation rate’s correlation with the US jobless rate is solid, it is not as high as the comparable correlation in Australia.
