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The bigger than expected 0.6% m/m decline in industrial production in November was largely due to a weather-related 4.3% m/m drop in utilities output, although mining output also declined by 1.1% m/m. Manufacturing output was unchanged last month, which is significantly better than the 0.3% m/m contraction economists were anticipating, based on the dip in the ISM manufacturing index to below the 50 mark and the reported drop in hours worked by manufacturing employees. In short, this won't prevent the Fed from raising interest rates today.
November's decline in total production was bigger than not only the consensus forecast (-0.1%) but even our own more bearish call (-0.4%). That's principally because the 4.3% m/m drop in utilities output was much bigger than the 1.7% m/m fall we had penciled in based on the weekly electricity generation figures. It's all down to the weather again, but in reverse this year. The eastern half of the US enjoyed near-record high average temperatures in November, holding down the demand for heating.
"We expect a weather effect to be reversed the following month, as temperatures return to seasonal norms. But that may not happen until next spring. Earlier this week it was warmer in Buffalo, NY, than it was in Los Angeles, CA. While the warm weather is depressing industrial production, it helps to explain why underlying retail sales were so strong last month", says Capital Economics in a research note.
The 1.1% m/m decline in mining output was the smallest decline in the past three months. Drilling activity is suffering a new downward leg, but actual oil output is holding up surprisingly well.
Manufacturing output increased by only 0.9% over the past 12 months and, given the dollar's surge, we wouldn't be surprised if it shrank slightly over the next six months. But, if anything, the data coming out of the euro-zone, China and Japan have been better than expected recently, so maybe we're being too pessimistic.
