Industrial production increased in April
Industrial production increased by 1.1% in April, growing twice as fast as market expectations. KPMG Senior Economist Tim Mahedy offers his three key takeaways from the April industrial production report.
Industrial production rose by 1.1% in April, growing twice as fast as market expectations. KPMG Senior Economist Tim Mahedy offers his 3 key takeaways from the April industrial production report.
April Industrial Production Report Screams: Let the Good Times Roll
An upbeat April U.S. industrial production report released by the Federal Reserve confirms the sector has achieved its strongest start to any year since 1972. The headline index blew past expectations for an increase of 0.5%, rising by 1.1% from March to April. With only a handful of sectors showing a contraction in activity, broad-based gains across market and industry groups are indicative of a robust expansion. This momentum should continue through the summer, despite the fastest pace of interest rate increases since the tightening cycle during 1994/95. This strong report, and the continued strength in consumer spending as evidenced by the April retail sales report, suggest that economic growth will rebound in the second quarter.
Manufacturing production continues to surpass expectations
The manufacturing sector continued to exceed expectations in April posting a monthly growth rate of 0.8%, doubling the consensus expectation for a rise in activity of 0.4%. Durable goods demand is traditionally an interest rate-sensitive sector, so demand for manufactured goods is likely to ease over the course of 2022. Still, the floor for aggregate demand is expected to remain high over the next couple of quarters as supply disruptions push some firms to onshore production facilities and businesses front-load capital investments stay ahead of rising capital costs.
Auto demand will shrug off rising rates for now
Production of motor vehicles and parts grew for a second consecutive month – activity expanded by 3.9% SAAR in April – a likely sign that supply chain disruptions continue to dissipate. Consumer demand for vehicles may be cooling as evidenced by the slowing rate of new vehicle price growth in the Consumer Price Index, and the easing from historic highs in the Manheim Used Vehicle Value Index. However, used vehicle prices remain near historical highs and the inventory-to-sales ratio for new vehicles is hovering around historic lows. This suggest production will need to remain strong to restock inventories even as rising rates impact consumer demand.
Three Key Takeaways:
- The industrial sector saw its best start to any year since 1972, and activity should remain strong in the second quarter.
- Demand for manufactured goods will likely cool this year, but still remain solid.
- The need to restock inventories is a strong tailwind to motor vehicle and parts production, even if consumer demand cools this summer.