US Industrial Production Posts a Steep Decline

Daily Forex Fundamentals | Written by RBC Financial Group | Oct 16 08 14:30 GMT |

US industrial production plunged 2.8% m/m in September after falling 1.0% m/m (revised from a 1.1% m/m fall) in the prior month. Capacity utilization fell to 76.4% following the prior month's 78.7%. The market was expecting a more muted fall with a decline in industrial production of 0.8% m/m and fall in capacity utilization to 77.9%.

The fall in industrial production marked the worst monthly decline since December 1974. The weakness was broad-based stretching to all industries except motor vehicles and utilities. Though consumer goods were hit hard with a 1.4% m/m fall, production of business equipment fell 7% m/m. This latter fall is the biggest month- on-month drop in the series dating back to 1947 and suggests businesses are retrenching and cutting back on investment likely hurting that component of GDP. The only industry hit harder was mining, which fell 7.8% m/m. Overall manufacturing production fell 2.6% m/m consistent with the steep fall in the ISM manufacturing survey for September. Some of this weakness, however, reflects the transitory impact of hurricanes Ike and Gustuv in addition to a strike at Boeing.


The only silver lining from this report is on the inflationary front. Overall capacity utilization fell to 76.4% from the prior month's 78.7% putting it at its lowest level since October 2003. Manufacturing capacity utilization fell to 74.5% after a 76.6% reading in August. The Fed looks at this as one measure of slack in the economy with a lower number suggesting less inflationary pressure.

The weakness in today's report buttresses the view that the US economy is on a downward trajectory. In response, we expect the Fed to cut the Fed funds rate by 50 bps bringing it to 1% by the end of this year.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.