U.S. Industrial Production Tumbles for Fourth Consecutive Month

U.S. industrial production tumbled for the fourth consecutive month in February. The headline figure fell 1.4%, slightly worse than the 1.3% drop anticipated by the market. This follows a 1.9% decline in January (revised down from 1.8%).

Weakness characterized most major industry groups. Manufacturing fell 0.7% month-over-month after January's 2.7% drop; utilities declined by 7.7%; and mining fell by 0.4% in February. The only bright spot was the bounce in motor vehicles and parts, which rose 10.2%, albeit from the prior month's precipitous 24.7% fall. This reflects the assembly rate rising to an annualized 4.73 million units from 3.83 million units in January. Excluding motor vehicles and parts, industrial production was down 1.2% on the month.

Capacity utilization fell to 70.9 following January's 71.9 reading (revised down from 72). This puts this measure of excess capacity at its lowest level since December of 1982 when the measure reported 70.9. Capacity utilization in the manufacturing sector made a new all-time low of 67.4 following the prior month's 67.9 reading. Combined with the rising unemployment rate, these rising measures of slack in the economy will likely put the Fed's mind at ease with respect to inflation.

Today's deterioration in industrial production is consistent with our view that the U.S. economy will contract through the first half of 2009. U.S. growth, however, is expected to turn positive in the second half of this year spurred by expansionary fiscal and monetary policy.

At the Fed's two-day meeting later on this week, we expect the Fed to leave its target Fed funds rate in the current 0% to 0.25% range. With inflation receding and growth remaining tepid, we expect the Fed to maintain its accommodative stance until the final quarter of next year.

RBC Financial Group
http://www.rbc.com

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.