US industrial production fell by 0.1% in October 2014 following a downwardly revised 0.8% gain in September (previously reported as 1.0%). The latest reading disappointed market expectations for a 0.2% increase. The modest decline reflected a 0.9% drop in mining output, which marked the sharpest decline in a year but did not fully retrace a 1.6% gain in September. Utilities output fell by 0.7% during a warmer than usual October although this also followed a stronger gain in September (4.2%). The more stable manufacturing component provided some offset with a 0.2% increase in October following a similar gain in September (which was previously reported as a 0.5% increase). This reflected a broad-based 0.3% increase in non-durables output, while durables managed a 0.1% gain despite a third consecutive decline in motor vehicles output (-1.2% in October). With a modest increase in the month, the manufacturing index was up an annualized 0.5% in October relative to its Q3 average. Overall industrial production is up an annualized 1.4% by the same measure as a strong gain in September provided a good starting point for Q4. Our expectation that monthly IP will return to positive growth should result in the quarterly gain rising as more complete Q4 data becomes available.
The decline in industrial output pushed the October capacity utilization rate back down to 78.9% from 79.2% in the previous month, which had matched a high for the current cycle.
Today’s reported decline in industrial production disappointed market expectations but reflected lower output in the volatile utilities and mining sectors, both of which saw fairly large increases in September. The more stable manufacturing sector marked another modest increase in October. Aside from the up-down pattern seen in July and August when seasonal adjustment issues affect auto sector production, manufacturing output has been a reliable source of growth in recent months. We expect this will continue with the ISM manufacturing index rising to 59.0 in October on the back of strong production and new orders readings. Furthermore, despite a disappointing headline reading in the latest month, the overall October industrial production index was still solidly above its third-quarter 2014 average. This strength in IP is consistent with our view that US GDP will continue to rise at an above-potential 3.1% pace in the fourth quarter of 2014.
