More Bad Economic News

Highlighted stocks include The Boeing Company (BA), General Motors Corporation (GM), TRW Automotive Holdings Corporation (TRW), Universal Forest Products, Inc. (UFPI) and Weyerhaeuser Company (WY)

Industrial production dropped 2.0% in December, following a 1.3% drop in November. (The November figure was revised sharply lower from an original indication of a 0.6% increase.)

The December figure was far below the consensus expectation for a 1.0% decline. The decline was even worse if you consider only manufacturing production which was down 2.2% following a 2.2% decline in November. Utilities declined a slight 0.1% following a 1.0% increase in November and mines dropped 1.6% following a 2.2% rise in November.

On a year-over-year basis, total production was down 7.8% from a year ago and manufacturing output was down 10.0%. Industrial production has now been down in 4 of the last 5 months. It dropped in the fourth quarter at an annual rate of 11.5%. That's a collapse folks and there are no signs that it is slowing down. Consider for a moment that natural Gas prices are currently under $5.00 at a time when the eastern half of the country is facing record cold temperatures. That tells me that industrial demand for natural gas has fallen to next to nothing.

Capacity utilization also dropped sharply, down to 73.6% from 75.2% in November (revised from 75.4%), and was well below consensus expectations of a 74.5% rate. To put that in perspective, in July we were using 79.4% of capacity and the long run (1972-2007) average capacity utilization is 81.0%. This was the lowest level of capacity utilization since December 2002 (the low point in terms of capacity utilization in the last recession), and just a few ticks away from being the lowest level since 1983. It is already below the bottom of the 1974-1975 recession. Manufacturing capacity utilization is even lower at 70.2% versus 71.9% in November and 77.1% back in July. The graph below is courtesy of http://www.calculatedriskblog.com.

The profitability of most manufacturing companies is highly correlated with capacity utilization. Factories that sit idle destroy profits. The industries with the lowest capacity utilization was autos and parts at 53.0%, down from 57.1% in November and 67.4% in July. Clearly this is not good for General Motors Corporation (GM) or its suppliers like TRW Automotive Holdings Corporation (TRW), but you already knew they were not doing well.

The other industry with an extremely low level of capacity utilization was wood products, where utilization fell to 54.5% from 57.4% in November and 65.3% in July. Given this, I would not expect good news from firms like Weyerhaeuser Company (WY) or Universal Forest Products, Inc. (UFPI) when they report their quarterly earnings. Then again that is true for most companies involved in manufacturing.

The one industry that bucked the trend was aerospace, where capacity utilization rose to 76.3% from 69.7% in November. That however was due to the ending of the strike at The Boeing Company (BA).

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Read the full analyst report on BA

Read the full analyst report on GM

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