Industrial Production Plunging

Highlights include Rockwell (ROK - Analyst Report), Emerson Electric (EMR - Analyst Report), General Electric (GE - Analyst Report), Ingersoll Rand (IR - Analyst Report) and Dover (DOV - Analyst Report).

Total industrial production fell 1.8% in January, following a decline of 2.4% in December and a 1.2% decline in November. It is now down 10.0% on a year-over-year basis. If one only looks at manufacturing output, the picture is even worse, with a 2.5% monthly decline following declines of 2.9% and 2.2% in December and November, respectively.

On a year-over-year basis, manufacturing output is down 12.9%. Colder-than-normal weather has been propping up the output of Utilities, where production rose 2.7% in January, following a 0.2% decline in December and a 2.0% increase in November.

Capacity Utilization also fell sharply in January, down to 72.0% from 73.3% in December for the overall index. A year ago, the country’s factories, power plants and mines were working at 81.0% of capacity, which is in line with the long-term average (1972-2008) of 80.9%.

The picture is even worse if one only considers manufacturing, where capacity utilization dropped to 68.0% from 69.7% in December and 79.1% a year ago. The current figures are the lowest since 1983.

Capacity Utilization is a very big deal for corporate profitability. Factories represent a very large fixed cost for companies, and it is hard to make money when they are sitting idle almost 1/3 of the time.

A good general rule of thumb for capacity utilization is that anything over 80% represents good times and will tend to stimulate more investment in productive capacity. Over 85%, and you are in a boom that is probably not sustainable; below 75% and the economy is in deep doo-doo. If we fall below 70% in coming months (for the total index), that might be a reasonable working definition of a depression.

While these numbers are not good news for anyone, they are particularly bad for firms that sell capital goods. Companies are not going to order new productive equipment when the stuff they have is sitting around gathering dust. Among the firms most notably affected by this would be Rockwell (ROK - Analyst Report), Emerson Electric (EMR - Analyst Report), General Electric (GE - Analyst Report), Ingersoll Rand (IR - Analyst Report) and Dover (DOV - Analyst Report).

Read the full analyst report on ROK

Read the full analyst report on IR

Read the full analyst report on DOV