US: Manufacturing held back by chip shortages

US industrial production for March was softer than expected, rising only 1.4% month-on-month versus the consensus 2.5% prediction. February data was revised down to show a contraction of -2.6% from the initial -2.2% reading. The details show manufacturing rose 2.7% MoM versus expectations of a 3.6% gain while mining rose 5.7% and utilities output fell 11.4% as the weather normalised and the demand for heating fell after a bitterly cold February.

February’s bad weather had also heavily impacted supply chains, thereby disrupting manufacturing production processes, so a bounce-back in March manufacturing was always widely expected. The scale of that bounce is a little disappointing though given what manufacturing surveys, such as the ISM release, have been reporting and highlights the negative impact the global semi-conductor chip shortage is having, particularly on auto output.

However, with order books looking full and customer inventory levels at historically low levels according to the Institute for Supply Management, when the semi-conductor position improves the output numbers will grow strongly.

Indeed, payrolls growth was very strong in March, which suggests ongoing optimism in the sector and with the $2tn+ Build Back Better infrastructure investment plan gaining traction this should offer additional opportunities for US manufacturing firms.

Rising commodity prices should also provide support over the next few months with Baker Hughes data showing there were an average of 408 oil and gas rigs working in March, up from 397 in February. Already mid-way through April we are up at 432, suggesting strong output gains in this and coming months.