US DATA: Industrial Production Setback In March Amid Otherwise Solid Quarter

Industrial production posted an unexpected decline in March, but this was partly driven by a revision to the base of comparison and largely reflected weakness in utilities and mining rather than manufacturing. While there were signs of broader manufacturing softness in March, we take greater signal from forward looking indicators in suggesting that activity in Q1 remained relatively solid, though business investment remains an outperformer vs consumer and nonindustrial sectors.

• Headline IP fell 0.54% M/M vs expectations of a 0.1% rise - but the upward revision to prior to +0.74% from +0.15% helped mitigate the shortfall. And the composition of the pullback was only slightly concerning: manufacturing production fell by 0.15% M/M after +0.35% (upward rev from 0.2%), but it was the always-volatile utilities industry that drove the March downside (-2.3% after +1.8%), with mining also posting a notable pullback (-1.2% after +2.1%).
• There were signs of softness across some key segments: "Production slowed in most market groups in March; declines in the indexes for consumer goods, for business equipment and supplies, and for materials were partially offset by growth in the output of construction supplies and of defense and space equipment. Declines were widespread among consumer goods industries."
• Consumer durables production's 1.8% decline was led by a 2.8% drop in automotive production, while for nondurables it was largely energy-related (-2.1% consumer energy production). Of note, tech investment remains an area of strength, with information processing equipment (+0.9%, after +0.7%) helping offset a pullback in overall business equipment investment (-0.3%, driven by a 2.2% drop in transit equipment).
• Capacity utilization for manufacturing fell 0.2pp to 75.3%, with bigger falls for mining and utilities leading to an overall "miss" in cap utilization (75.7%, vs 76.3% consensus and 76.1% prior).
• Overall this leaves business equipment and energy industry materials production near its 2019 levels (having dropped sharply during Covid), while durable/nondurable consumer goods and production is stagnant at below 2019 levels. As such the manufacturing expansion looks precariously narrowly focused on tech, but likewise there is little indication of a reversal in overall expansion.
• With ISM and regional Fed manufacturing posting solidly expansionary readings through March, durable /capital goods orders posting continued strength, and equipment investment is set to be the single biggest driver of GDP growth in Q1 (eclipsing private consumption) amid AI/data center expansion as well as new investment tax incentives coming into play, the immediate outlook for US industry is stronger than the IP headline aggregates would seem to imply.