Introduction to US Manufacturing
It’s a popular myth that manufacturing no longer matters in the U.S. economy. Although China is the world’s largest manufacturer and exporter, U.S. manufacturing and mining aren’t dormant by any means, producing a hefty 18% of all the stuff the world consumes. And Wall Street keeps close tabs on the health of this economic powerhouse, which still can have a major impact on the stock market and the economy as a whole.
The Importance of Manufacturing in the US Economy
Manufacturing makes up around 11% of U.S. gross domestic product (GDP) and a whopping 70% of research and development (R&D) spending. If you’ve ever filled a prescription, shopped at a grocery store, bought a newly constructed home, or shopped for electronic goods, you’ve contributed to the U.S. manufacturing sector. Leading subsectors of U.S. manufacturing include chemicals and pharmaceuticals, food and tobacco, furniture, motor vehicles, and electronic equipment.
Understanding Industrial Production and Capacity Utilization
Investors who want a big-picture view of how this mighty industrial complex affects the economy and Wall Street should consider following a monthly two-part report from the Federal Reserve called Industrial Production and Capacity Utilization. The report measures the output of manufacturing, mining, and electric and gas utilities in the U.S., as well as how much of their manufacturing capacity companies are putting to work.
Key Points to Consider
- Industrial production and capacity utilization reports provide a comprehensive view of U.S. manufacturing.
- The data provides insight into consumer and business demand, helping investors get a big-picture view of the economy.
- The data may also give clues into future Fed strategy and fiscal policy.
Touring the Factory Floor
The two categories of the report are:
- Industrial production: Actual U.S. monthly manufacturing output.
- Capacity utilization: The percentage of production infrastructure (factories, mines) that is being used; also a measure of potential output.
Industrial production numbers are presented as an index, which helps analysts visualize the numbers over time and get a better sense of what the current reading means. The averages tend to move in patterns. Most investors follow the month-over-month industrial production percentage gains or losses to get the most up-to-date insight from the report.
Interpreting the Data
These aren’t the only monthly reports on the U.S. manufacturing economy, by the way. Investors who want a fuller picture should also consider following monthly data on factory orders as well as the ISM Manufacturing Index. The government’s quarterly GDP reports can also provide insight into manufacturing health.
High Production and Utilization Readings
If production and utilization readings are high (or rising), this indicates that manufacturers are busy producing goods for the present and the near future, probably because consumer demand is strong and expected to remain strong in the near term.
Low Production and Utilization Readings
If production and utilization readings are low (or slowing), consumer demand may be weak or weakening and economic growth may be declining. An economy that’s slowing typically means sectors like utilities, consumer staples, and health care might outpace so-called “growth” sectors, although results can vary.
The Impact on Investors
As an investor, you might ask whether manufacturers are expecting demand to slow and are responding accordingly. If consumers choose to save money rather than spend it, then a business will find no reason to increase its expenditures.
Conclusion
The monthly Industrial Production and Capacity Utilization report provides a comprehensive view of the manufacturing side of the economy. It won’t give you the full picture, but if you follow it along with other major reports measuring consumer and business confidence, inflation, and employment, it can give you a wider view of current economic conditions and perhaps a hint about what to expect for the stock market in the near future. Because manufacturing is only 11% of GDP, there’s a lot of other data out there for investors to study before deciding if a recession or an inflationary period may be underway. Still, this report can offer useful clues.
