Third straight drop for industrial production in November

Summary

The expected bounce in industrial production was a no-show in November. If you look closely enough, there are some rare examples of growth, but overall production is down 0.7% year-to-date and manufacturing capacity utilization is at a seven-year low (excluding the pandemic).

No post-storm, post-strike bounce

After storms and strikes held back factory output in October, the hopeful expectation held by the consensus was for a 0.5% payback jump in manufacturing output for November. Instead, today's report on industrial production offers a sobering assessment of the state of production. Yes, manufacturing technically rose in November, but the scant 0.2% gain was roughly equal to the size of the downward revision to last month's report which switched out an initially reported decline of 0.5% and replaced it with a 0.7% drop.

Motor vehicle assemblies offered what appeared to be a relative bright spot with production there up 3.5% in November, but that was not enough to recoup the 5.4% drop in the October output for that category. Excluding motor vehicles and parts, manufacturing output was down 0.1% in November.

Setting aside COVID disruption, factories are idling in a way we have not seen in seven years. Capacity utilization in the manufacturing sector is at 76.8%. Excluding the pandemic, capacity has not been that low since 2017.

Overall manufacturing has been an unexciting sector to follow this year. By most measures, it has done little more than tread water in terms of growth as the total index has essentially trended sideways to slightly down. Manufacturing production is 0.9% lower today than it was at the end of 2023 (chart). Activity remains stuck in a rut.

Yet under the surface there's been some bright spots. The nearby chart shows the recent growth momentum by manufacturing sector as well as its annual change. You want to be in the top right quadrant. From this visual we can see strength is certainly concentrated. The computer & electronic products space has been a notable exception to a weak manufacturing environment, initially seeing a lift from work-from-home spurring new investment which was then sustained by the initial automation and AI boost. Chemical products, which represent the second largest share of U.S. manufacturing behind the food & beverage industry, have also proved resilient and provided a notable offset to weaker areas of production.

For much of the year we had been pointing to 2025 as to when to brace for a meaningful boost to capex spending. We may have to wait a bit longer. Certainty has been hard to find in recent months as sticky inflation puts the Fed path to further easing in question and incoming President-elect Trump's tariff policies are unclear.

In meetings with manufacturing clients since the election, our conversations are mostly about tariffs. Many companies express a mixed assessment in the wake of the election: optimistic about the results (corroborated by the big jump in NFIB small business optimism in November) and apprehensive about whether statements about tariffs are just tough-talk or the articulation of actual policy plans. We'll be watching for any manufacturing composition shifts in coming months for how firms are managing volatility. Yet the sentiment is that big capex plans keep getting pushed out and many firms are planning for a 2025 that resembles 2024.

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