Big Drop In Industrial Production, Consumer Energy Products Blamed; Capacity Utilization In Line

The Fed reported February Industrial Production of -0.1%, a big drop from January's 0.3% increase, and a major miss from expectations of 0.6%. The primary reason for the drop was a decline in consumer goods final products which declined by 0.5%. Commentary from the Fed for the reason on this surprising decline: "The production of consumer goods fell 0.5 percent in February, largely because of weakness in consumer energy products. The output of consumer durable goods rose 2.4 percent, with gains in all of its major categories. The production of consumer automotive products advanced 3.5 percent, and the index for home electronics moved up 1.0 percent. The index for appliances, furniture, and carpeting climbed 3.1 percent, which almost offset its decline over the two previous months, and the production of miscellaneous consumer durables increased 0.6 percent. The output of non-energy nondurable goods moved down 0.2 percent. Reductions in the production of foods and tobacco, of chemical products, and of paper products more than offset an increase in clothing output. The output of consumer energy products fell 5.2 percent, largely because of a drop in residential sales by electric and natural gas utilities." The capacity utilization rate for total industry edged down 0.1 percentage point to 76.3 percent, a rate 4.2 percentage points below its average from 1972 to 2010. And since this is a key variable for "slack" calculations by the Fed, it provides yet another clue into the possible move to QE3 as the Fed will likely see substantial potential to make up this variation from the trendline using another few hundred billion in asset purchases.

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