

Video transcript
Industrial production dropped 0.1% from November to December, dipping below market expectations. The decline is largely attributed to the rapid spread of Omicron, persistent supply shortages, and unseasonably warm weather easing demand for utilities. KPMG Senior Economist Tim Mahedy provides his three takeaways from December’s report and what to expect in January.
Omicron slows industrial production in December
Industrial production dropped 0.1% from November to December, dipping below market consensus expectations of a 0.2% increase. The decline is largely attributed to the rapid spread of the Omicron variant, persistent supply shortages, and unseasonably warm weather easing demand for utilities.
We expect pandemic-related factors will continue to impact production in January. However, industrial production grew at a seasonally adjusted annualized rate of 4% in the fourth quarter, and overall capacity utilization remains above its pre-pandemic level. Both suggest that underlying fundamentals should be able to weather the recent surge if short-lived.
Manufacturing volatility continues in 2022
Manufacturing production, which constitutes around three-quarters of the overall index, fell 0.3% in December due in large part to a decline in motor vehicle production. Ongoing sector volatility is anticipated throughout the first half of 2022, resulting from shortages of semiconductors and other global supply chain disruptions.
Meanwhile, labor shortages continue to worsen. As a result, manufacturing job gains are poised for a sluggish 2022 start, following a fourth quarter slowdown in 2021. Since monthly changes in the production index are highly correlated with the pace of job gains, we expect pandemic-related headwinds to negatively impact manufacturing employment in January.
Can underlying fundamentals outlast Omicron?
Even with the January surge in infections and hospitalizations, supporting data suggests that the impact from Omicron should be temporary. Overall capacity and manufacturing utilizations remain above their pre-pandemic levels, and new orders in the ISM manufacturing survey are elevated by historical standards, indicating strong demand potential. Keep an eye on these key indicators if the latest surge persists beyond the experiences of other countries.
Key takeaways
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