November 16, 2010

Industrial Production Up; October’s PPI Increase Fueled by Gas Prices

Manufacturing rises, but utility usage down sharply

Factories chugged away in October, recording their biggest increase in three months, and producer prices were up as well, thanks to rising gas prices.

Manufacturing was up by 0.5%, coming on the heels of a revised September increase of 0.1%, in figures released Tuesday. Originally September had been reported as a drop of 0.2%. Overall, however, production was unchanged; unseasonably warm weather cut demand for heating, and utility output dropped by 3.4%.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, pointed out in a statement that the consensus forecast was an increase of 0.3%. Capacity use, also unchanged at 74.9%, came in under consensus as well; 74.8% had been expected.

About the drop in utility output, Shepherdson said, “[W]e expected a decline but not that big. The key implication,” he added, “is that real consumers' spending on energy dropped sharply last month, probably by enough to subtract a tenth from the headline consumption number.” Regarding manufacturing output, however, he was positive: “[it] rose a healthy 0.5%, the best performance since July.”

Producer prices rose 0.4% in October, according to a report released by the Bureau of Labor Statistics on Tuesday; that’s the same as September and August, and the fourth increase in four months. Much of that increase was due to prices of finished energy goods, which rose 3.7%.

Shepherdson explained that the rise was due to a 9.8% rise in gas prices, “but the big story is the 3.0% plunge in car prices and the 4.3% drop in light truck prices, which depressed the core.” Such a large drop in car prices hasn’t been seen since July 2006, he says, “when the core PPI last fell by 0.6%. So now we know why auto sales were so strong last month; the manufacturers were giving them away.”

Even though there was such a drop in auto prices, auto output rose—as did non-auto. Richardson was pleased: “With the ISM survey reporting renewed strength in orders we think output will continue to rise at a decent pace. Within the October data, the strongest manufacturing sector was business equipment, up 1.3%; [this was] very welcome.”

Reprints Discuss this story
This is where the comments go.