Omicron slows industrial production in December

Industrial production dropped 0.1% m/m in December, dipping below market expectations. KPMG Senior Economist Tim Mahedy provides his three takeaways from December’s report and what to expect in January.

Tim Mahedy

Tim Mahedy

Senior Director, Office of the Chief Economist, KPMG LLP

+1 415-963-5103

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

  • Despite the December contraction in industrial production, we still expect the economy to grow at a seasonally adjusted annualized rate of 5.5% in the fourth quarter of 2021.
  • Even though we expect both industrial and manufacturing production to show weakness in January, underlying fundamentals suggest the sector can weather the Omicron surge.
  • The temporary dip in industrial production and manufacturing employment is unlikely to affect the Fed’s decision to raise rates at the March FOMC meeting.