Industrial output in the economy continued to struggle in March, as a stalled manufacturing sector continues to weigh on freight demand in the economy.
The Federal Reserve released results from the industrial sector, showing that total industrial production fell by 0.1 percent in March from February’s levels. This fell short of consensus expectations of a 0.1 percent gain and reverses the 0.1 percent gain in the previous month. For the first quarter, total industrial production fell at a 0.3 percent annualized pace, marking the first quarterly decline since the third quarter of 2017. As a result, year-over-year growth slipped to 2.8 percent in March, well below the multi-year high of 5.4 percent reached in September 2018.
Manufacturing growth has slowed considerably since 3rd quarter 2018
Manufacturing production, which makes up 70 to 75 percent of total industrial output in the economy, was essentially unchanged in March following two consecutive monthly declines in January and February. Year-over-year growth slipped slightly to 1.0 percent as a result, down from an upwardly revised 1.1 percent in February.
Much of the disappointment in the manufacturing sector in March was driven by motor vehicle production, which is now down 4.5 percent from this point last year after the second large decline in three months. Excluding autos, the manufacturing sector managed to eke out a respectable 0.2 percent gain during the month, led by strong growth in primary metals, petroleum products, and computers & electronics production.
Behind the Numbers
March’s results serve as a disappointing capstone on a dismal quarter for the manufacturing sector. Mining activity, which was one of the sources of strength for total industrial production throughout most of 2018, fell again in March and has essentially stalled since December 2018. Domestic manufacturing continues to face real headwinds from the slowdown in global growth and softer investment demand in the U.S. economy. On top of that, the first quarter also had additional disruptions from the government shutdown, the polar vortex and flooding across the Midwest, and continued trade policy uncertainty. If nothing else, these factors likely reduced business investment demand further in the first quarter, curbing manufacturing activity in the process.
This has clearly filtered into freight markets, slowing the growth of transportation demand in the economy. Manufacturing activity forms the foundation for a large percentage of freight movements in the economy, as domestically produced goods get transported to warehouses and retailers on their way to the end consumer. In addition, the resurgence of the U.S. energy sector has provided additional support for freight demand, and as mining activity has stalled, so has much of the freight moving in and out of oil fields. It is no coincidence that the last freight recession occurred during the worst period for industrial output since the Great Recession, and the industrial sector will continue to weigh on freight activity as long as the slowdown persists.
On a positive note, there were signs of life in some industries in the manufacturing sector. The weakness in manufacturing in March is largely attributable to auto production and softness in the housing and construction market, which likely contributed to the decline in wood and furniture production during the month. Absent that, most major industry groups managed some growth during the month. In addition, there is fresh hope that the U.S. and China will reach a deal on trade sooner rather than later, which could provide much-needed boost to business investment in the economy. FreightWaves expects that manufacturing and industrial output will begin to improve in the middle of the year, though the pace of growth is likely to remain slow.
Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.