Industrial Production Feb 2025: Capacity Utilization

The manufacturing sector posted some favorable sequential numbers ahead of the tariff dislocations on the horizon.

Mar 18, 2025

Is motive power belching or blinking?

Capacity utilization ticked higher at the headline level during Feb 2025 and posted favorable sequential moves for total industry, total manufacturing, durables, and nondurables.
Motor vehicles posted the best sequential move among major industry lines. Unfortunately, tariffs heighten disruption risk as the year proceeds. The auto supplier-to-OEM chain will be subject to supplier chain financial stress, trade partner retaliation, strike risk (irate assembly line workers) and potentially semiconductor shortages tied to Trump policies.
In the interest of long-term plans to encourage investment in US manufacturing, the passport to paradise involves crippling some supplier chains and ignoring the views of manufacturers based on the theories of some B Team economists.

The above chart updates the time series for total manufacturing capacity utilization. We see a sequential uptick from 76.4% in Jan 2025 to 77.0%, which is still well below the long-term average of 78.2%. The 77.0% rate frames up well vs. 2H24 numbers. The peak utilization was seen in spring 2022 ahead of the tightening cycle impacts.

The higher-level buckets in the Total Industry mix are detailed above. It offers a reminder that we had a steady but unimpressive set of manufacturing metrics in 2024. They are holding for now. We break out the deltas for MoM on the right. The MoM numbers show positive sequential variances with the exception of Utilities. Durables performed well MoM.

The above chart breaks out the largest of the Durable and Nondurable groups. We see 3 of the 5 durables industries posting positive variances MoM with Machinery flat and Computers and Electronics slightly lower.

The above table updates the capacity utilization history for expansions and recessions. The ability of more companies to generate solid profits at lower capacity utilization in today’s markets is tied in part to automation and in part to the development of low-cost supplier chains. Low-cost supplier chains are now fatally threatened by tariffs.

Those supply chains had comprised the risk mitigating structural advantages of global sourcing that are about to be shredded. The new policies are based on a highly speculative concept of how tariffs will translate into mass investment in the US to reshore and expand while customers scrap their offshore supplier base. That will unfold with the risk of what the policy architects have described as “mild disruptions” and a “little pain” with some backpedaling on recession probabilities (that was not the campaign story line).

The topic of low-cost supplier chains has been a challenge for Trump to grasp the concepts, and his tariff policies will serve to raise breakeven volumes again on higher unit costs. That means the buyer of the supplies will see the cost of sales rise, which in turn requires the “buyer” (who pays the tariffs) to raise prices or take out other costs to preserve margins. We have covered these topics in detail (see The Trade Picture: Facts to Respect, Topics to Ponder 2-6-25 and the Tariff Links at the bottom of this commentary).

The above chart details expansion and recession averages and lines them up by height as a frame of reference. We see the current level on the left. We see current utilization below a number of recession periods. That was acceptable with lower cost supplier chains. For many companies, those days are numbered given the tariff game plan.

Footnotes & Flashbacks: State of Yields 3-16-25

Footnotes & Flashbacks: Asset Returns 3-16-25

Mini Market Lookback: Self-Inflicted Vol 3-15-25

Credit Spreads: Pain Arrives, Risk Repricing 3-13-25

Trade: Betty Ford Tariff Wing Open for Business 3-12-25

CPI Feb 2025: Relief Pitcher 3-12-25

JOLTS Jan 2025: Old News, New Risks in the Market 3-11-25

Credit Spreads Join the Party 3-10-25

Mini Market Lookback: Tariffs Dominate, Geopolitics Agitate 3-8-25

Payrolls Feb 2025: Into the Weeds 3-7-25

Employment Feb 2025: Circling Pattern, Lower Altitude 3-7-25

Gut Checking Trump GDP Record 3-5-25