US industrial sector likely to record weak growth in following quarters

US industrial output result in March was disappointing. Production declined 0.6%, much below consensus forecast for a drop of 0.3%. The weak data is because of annual revisions, which indicate that production was softer in 2014 and 2015 that expected earlier. With the current issues in the country’s energy sector, certain weakness was anticipated.

For the seventh consecutive month, mining output fell 2.9% m/m, the biggest fall since 2008. In the past year, drilling activity dropped, leading to a slowdown in oil and gas extraction. Moreover, mining production, stripping oil and gas, declined almost 6% last month and fell 17% y/y. Furthermore, manufacturing production dropped 0.3% after February’s figure was revised downwardly that indicates factory output shrank in February. The drop was mainly because of a 1.6% decline in motor vehicles and parts; however, fabricated metals and machinery declined too.

But in recent months, manufacturing has fared much better than other segments of the industrial sector, noted Wells Fargo. On an annual basis, the total industrial production declined 2%, but utilities and mining industries are the ones mainly responsible for the weakness.

However, there are certain positive signs rising for business spending and manufacturing, according to Wells Fargo. Since the start of 2016, the US dollar has depreciated around 5%, while commodity prices have recovered by around 10%. Moreover, a rise in the Empire State Manufacturing Index underpins the opinion that the manufacturing sector’s worst might be over, added Wells Fargo.

However, even if the past year’s major headwinds are diminishing, the factory sector still faces certain tailwinds, said Wells Fargo. Producers have received support from the moderate recovery in commodity prices; however prices are unlikely to increase significantly for some time. Also, even though the US dollar has pared some of its gains, it continues to be quite strong.

“With global growth still sluggish, we believe that growth in the U.S. industrial sector will remain fairly tepid in the coming quarters”, noted Wells Fargo.