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Supply Chain Improvements Drove September’s Industrial Recovery

Supply Chain Improvements Drove September’s Industrial Recovery

Posted October 18, 2022 at 11:15 am
Jose Torres
IBKR Macroeconomics

Industrial production and capacity utilization data released today appear favorable for GDP while providing somewhat mixed messages about inflation. Industrial production notched a 0.4% month-over-month gain, better than expectations of 0.1% and a recovery from August’s 0.1% decline. On a year-over-year basis, September’s gain came in at 5.3%, better than August’s 3.9% reading. Capacity utilization recovered back to the July level of 80.3 after falling to 80.1 in August. Gains were broad based across major market and industry groups and driven largely by supply chain improvements.

Supply Chain Improvements Drove September's Industrial Recovery

On an optimistic note, higher industrial production and capacity utilization are positive on the inflationary front because more goods being produced offers more supply for consumers to bid on, softening price pressures as consumers have more options.

At the same time, capacity utilization, or the percentage of the industrial sector’s production capabilities being used, implies that efficiencies are improving, a deflationary development. Within today’s data release, furthermore, business equipment had the largest year-over-year production increase, reaching 8.2%, implying that the economy’s production capacity is increasing and that business sentiment about the economy may be improving.

Industrial activity, however, is expected to slow in the coming months due to the shift in spending from goods to services, tightening financial conditions, slower economic growth and international challenges. 

On balance, today’s report is favorable for GDP.  Increasing production and higher capacity utilization means that the demand for goods is rising and that production is improving. GDP is driven mainly by consumer spending in the U.S. and in most developed nations, so improving demand is encouraging.

The production of major market groups experienced strong recoveries that erased most of August’s losses. Construction, consumer goods and business equipment posted solid gains of 1.1%, 0.6%, and 0.5%, offsetting all of August’s weakness and adding gains on top. Materials also contributed to gains albeit more modestly. Major industries also performed well during the month with mining and manufacturing posting gains of 0.6% and 0.4%. Utilities offset some of the progress with a contraction of 0.3% during the period.

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