U.S. industrial production remained soft in January

*U.S. industrial production (IP) declined by 0.3% m/m in January (consensus: -0.2%), its fifth decline in the last seven months, pushing it 0.8% below year-ago levels. Despite the prolonged and frustratingly sluggish IP, its declines are far less than those observed during 2015-16 (Chart 1).

*The decline in January’s IP was accentuated by a sharp 4% m/m decline in utilities production due to the unseasonably warm weather that reduced heating demand and the 10.7% m/m decline in production of aircrafts and parts due to Boeing’s suspension of the 737 MAX production in January (Chart 2). We expect this Boeing issue to lead to a below-trend 1.5% q/q annualized increase in real GDP in Q1.

*Motor vehicles and parts (2.4% m/m) and mining (1.2% m/m) production were the only bright spots in the report.

IP in other key advanced economies has yet to show any sign of sustained improvement, despite the better readings on manufacturing PMIs in recent months (Table 1), and is now expected to be dented by the ripple effects of China’s coronavirus (Covid-19). The hit to China’s domestic demand and production reduces its demand for foreign goods, disrupts global supply chains, and is expected to constrain global trade. Anecdotal evidence of disruptions to global supply chains and production facilities are beginning to emerge.

The details of U.S. January IP remained broadly weak – only seven of the 23 industry groups increased yr/yr, the tenth consecutive month in which less than half of the IP categories have grown (Chart 3).

Noteworthy observations include:

1) Although manufacturing production ex motor vehicles declined by 0.3% m/m in January, its three-month (+1.2%) and six-month (+1.4%) annualized changes suggest that underlying demand for manufactured products is gradually increasing (Chart 4).

2) The 4% m/m decline in utilities production will be associated with lower consumption of services in Q1 GDP. The unseasonably warm first week of February suggests this trend will continue.

3) The IP subcategory drilling of oil and gas wells was unchanged in January following declines in the prior six months. It is on track to decline by 7.3% q/q annualized in Q1 and will again weigh on the Bureau of Economic Analysis’ estimate of structures investment in GDP (Chart 5).

Chart 1:

Chart 2:

Table 1: Trade and Production for Key Economies

Source: China Customs, Japan Ministry of Finance, Japan Tariff Association, Japan Ministry of Economy, Trade & Industry,

Korea Customs Service, Statistics Korea, Deutsche Bundesbank, Eurostat, Census Bureau, Federal Reserve Board,

Banco Central do Brasil, Instituto Brasileiro de Geografia e Estatistica, and Berenberg Capital Markets

Chart 3:

Source: Federal Reserve Board and Berenberg Capital Markets

Chart 4:

Chart 5:

Mickey Levy, mickey.levy@berenberg-us.com

Roiana Reid, roiana.reid@berenberg-us.com

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