Factory Production Unexpectedly Plunged in December, Worsening Supply Constraints

U.S. factory production suffered a sharp and unexpected downturn in December, a development that is likely to add to inflationary pressures in an economy beset with supply constraints.

Manufacturing production declined 0.3 percent in December, falling far short of the 0.5 percent gain forecast. November’s gain was revised down to 0.6 percent from the preliminary estimate of 0.7 percent.

Automakers continue to lag when it comes to production. The index for motor vehicles and parts dropped 1.3 percent in December and was about 6 percent lower than its year-earlier level.

But manufacturing outside of autos also contracted. Excluding the motor vehicle sector, factory output dipped 0.2 percent, with similarly sized decreases for durables and nondurables.

Capacity utilization, a measure of how much potential output is being used, fell two-tenths of a point to 77 percent. Capacity utilization for finished goods declined from 77.1 percent to 76.9 percent.

Overall industrial production–which includes factory output as well as mining and utilities–fell 0.1 percent in December, the first decline since September. Utilities output fell 1.5 percent due to mild weather. Mining output rose two percent, the third monthly increase, likely driven by increased demand for oil and natural gas.

The drop in manufacturing production and utilization in December is particularly troubling because the surge in infections due to the omicron variant of the coronavirus occurred only toward the end of the month. It is likely that high rates of infection and quarantines will result in many workers having to stay home for several days in January, which could further weigh on production. That would likely raise inflation higher than it would otherwise be.

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