The May Industrial production, (IP) report came in at 109.56, gaining 0.4% month on month, (m/m). On a year on year, (y/y) basis, the IP index was up 2.6%. Overall capacity utilization rose 0.4 percentage point, while manufacturing capacity utilization rose 0.9 percentage point. Utility production rose 2.1% in May, bouncing back from a sharp decline in April. Output at U.S. factories rose a more modest 0.2%. In the first four months of the year, it had decreased about 0.4% a month on average. The manufacturing industry’s output accounts for about 75% of the nation’s total industrial output.

Capacity utilization, which reflects how much industries are producing compared with what they could potentially produce, increased by 0.2 percentage point to 78.1% in May. Economists had expected 77.8%.

Industrial production is a pure measure of output, untainted by the effects of price swings, in the industrial part of the U.S. economy. Every month, the Federal Reserve calculates an index of industrial production after collecting data on 312 industry components representing manufacturing, mining, and the electric and gas industries. The individual series are constructed from two types of source data: (1) output measured in physical units and (2) data on inputs into the production process, in which output is inferred. Each component is given a weight based on how important it is to the economy. These weights are adjusted once a year. The current reference period for the index is 2002.

Figure 1 illustrates the U.S. industrial production from 2010 to present as a three-month moving average, (3MMA) on the left hand Y-axis. Year on year change in percent is shown on the right hand Y axis. The 3MMA in May was 109.44, up 0.4% m/m and up 2.6% year on year.

The economy continues to be strong both domestically and globally. Supporting this argument is the utilization of transportation equipment which recorded its highest capacity utilization rate in 20 years. Concerns on the horizon are labor constraints and rising wage pressures.

We monitor U.S. Industrial Production at Gerdau because it gives a real time evaluation of the current health and insight on the short-range future of the manufacturing sector.