Treasuries Cheer a Dovish Federal Reserve (Part 4 of 9)
(Continued from Part 3)
Output rises but disappoints
Industrial production rose by a meager 0.1% pace in February 2015 after falling by a downwardly revised 0.3% pace in January 2015. Earlier, industrial production was estimated to have risen by 0.2% in January.
The pace of change in industrial production was downwardly revised for all months from September 2014 through January 2015. From a year ago, industrial production was up 3.5% in February. Industrial production is comprised of the manufacturing, mining, and utilities industries.
Production from industries
Production from industries is an important indicator for economic health. If industries are doing well, it signals an inherent strength in the economy, especially for industrialized countries like the United States.
ETFs such as the SPDR Industrial Select Sector Fund (XLI), the SPDR Dow Jones Industrial Average ETF (DIA), and the SPDR Utilities Select Sector Fund (XLU) closely monitor this monthly report. Stocks of companies such as 3M (MMM), Boeing (BA), and United Technologies (UTX) are common holdings among industrials-focused ETFs (XLI) (DIA).
Broader market ETFs such as the SPDR S&P 500 ETF (SPY) and the iShares Core S&P 500 ETF (IVV) are also boosted due to the implications of a stronger industrials sector.
Manufacturing’s disappointing results
Manufacturing disappointed when it fell by 0.2% month-over-month in February. It was the third consecutive monthly decline. This indicates a softening in the once massive US manufacturing sector. For economic output purposes, manufacturing has not remained as significant as it used to be. But it still can push economic growth down if activity doesn’t pick up.
Durable goods production fell 0.6% in February with the motor vehicles and parts industry reporting a 3.0% decrease, the largest among durable goods manufacturers.
Mining activity also fell with the mining index falling by 2.5% in February month-over-month after falling 1.3% in January. Mining was driven down by a drop in coal mining and oil and gas well drilling.
Utilities was the only industry group that rose. Unusually cold temperatures in several parts of the United States increased the demand for heating, which led to a rise in the utilities index. The index jumped by 7.3% in February after rising 1.0% in January.
Higher utilities costs are beneficial for companies such as Duke Energy (DUK), NextEra Energy Inc. (NEE), Dominion Resources (D), and Southern Company (SO). Together, these companies make up ~32% of the SPDR Utilities Select Sector Fund (XLU).
Capacity utilization
Capacity utilization measures the level of utilization of resources by industries. A low percentage signals slack. US industries were utilizing 78.9% of their capacity in February, down from 79.1% in January and lower by 1.2% of its long-run average.
Mining was using 84.6% of its capacity in February, while manufacturing was using 77.3%. Among manufacturing industries, petroleum and coal products were using 85.8% of their capacity. This was followed by electrical equipment, appliances, and components, which was using 84.1% of its capacity.
The capacity of textile and product mills, among others, increased month-over-month in February. Motor vehicles and parts, among others, fell.
Next, we’ll look at why a rise in leading indicators in February still disappointed.
Continue to Part 5
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