Industrial Production Consistent with Recessionary Levels, Economists Say

Weakness in U.S. industrial production is consistent with recessionary levels, economists said following the 0.7% decline in Thursday's report from the Federal Reserve.

Economists were looking for industrial production to fall by 0.3% in April.

T.J. Marta, fixed income strategist from RBC Capital Markets, said the "collapse" resembles the turbulence seen during the 1990 recession, the 2001 recession, Hurricane Katrina, and the start of the Iraq War.

Michael Montgomery, economist at Global Insight, said there were not very many positives in the report, save for computers and electronics, which are running close to average.

Mining fell 0.8% in the month, which Montgomery said is due to a leak at the Independence Hub natural gas production platform in the Gulf of Mexico. The leak caused the facility to shut down in April, though it is now being fixed.

Motor vehicles and parts fell 8.2% in the month, contributing to a 0.8% decline in the manufacturing sector. Montgomery said much of this decline was foreshadowed in last Monday's report from Ward's Automotive, the industry standard report used by the BLS and the Fed.

Jacqui Douglas, economics strategist from TD Securities, said the weakness will be closely watched by the Fed. She said production is at its "slowest pace since mid-2003, and that slack continues to build with the softening in capacity utilization."

Capacity utilization assesses current output as a percentage of maximum capability, thereby measuring the amount of slack in the economy. Overall, CAP-U declined more than anticipated to 79.7% in May, which should mean there is less upward pressure on inflation.

However, Montgomery said the pressure points are in places where output didn't go down, such as primary metals and chemicals. He said there is still inflationary pressure on sectors that continue to do well on account of exports.

By Patrick McGee edited by Cristina Markham