Economic Watch: Industrial Production Posts Biggest Annual Gain in 7 Years

A surge in industrial production for December exceeded expectations, but the strength was largely a function of a weather-related utilities spike. A separate report showed a lot of optimism remains when it comes to the market for newly built homes.

The Federal Reserve's Industrial Production Index, a measure of output from factories, mines and utilities, rose 0.9% in December, but manufacturing output only edged up 0.1%. The gain in manufacturing output in December was its fourth consecutive monthly increase. The output of utilities advanced 5.6% for the month, while the index for mining moved up 1.6%.

The overall gain was slightly more than double a consensus estimate from analysts.

For the fourth quarter as a whole, total industrial production jumped at an 8.2% annual rate after being held down in the third quarter by Hurricanes Harvey and Irma.

At 107.5% of its 2012 average, the index was 3.6% higher than December 2016 for its largest calendar-year gain since 2010.

Capacity utilization for the industrial sector was 77.9%, a rate that is 2 percentage points below its 1972–2016 average.

Wells Fargo Securities noted that an upwardly revised 0.3% gain in manufacturing for November, coupled with an October surge of 1.5% and December’s performance, put the three-month annual growth rate for the manufacturing sector at 7.8%, which it said “is about as strong as we have seen since the very early days of the current expansion.”

Home Builders Optimistic About 2018 Market

A separate report showed a gauge of builder confidence in the market for newly built single-family homes remained high despite a slight drop.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) dropped two points this month after reaching an 18-year high the month before.

“Builders are confident that changes to the tax code will promote the small business sector and boost broader economic growth,” said NAHB Chairman Randy Noel. “Our members are excited about the year ahead, even as they continue to face building material price increases and shortages of labor and lots.”

Derived from a monthly survey that NAHB has been conducting for 30 years, the HMI gauges builder perceptions of current single-family home sales and expectations for the next six months.

“The HMI gauge of future sales expectations has remained in the 70s, a sign that housing demand should continue to grow in 2018,” said NAHB Chief Economist Robert Dietz. “As the overall economy strengthens, owner-occupied household formation increases and the supply of existing home inventory tightens, we can expect the single-family housing market to make further gains this year.”

The three HMI components registered relatively minor losses in January. The index gauging current sales conditions dropped one point to 79, the component charting sales expectations in the next six months fell a single point to 78, and the index measuring buyer traffic fell four points to 54.