U.S. industrial production fell 1.8% in January compared to the expected 1.5% decline. December's reading was revised down to -2.4% from the initially reported -2%. Capacity utilization fell to 72% from the prior month's 73.3% (revised down from 73.6%).

January's fall was concentrated in the manufacturing sector. Idle auto plants contributed to the 23.4% fall in automobile and parts production, the biggest fall in the history of the series. However, even excluding vehicles, the production numbers were weak, posting a 1% drop. Machinery production fell 4.2% and computers & electronics production fell 1.7%. The mining category declined 1.3% on the month. Utilities output rose 2.7% in January.

Capacity utilization declined to 72% from the prior month's 73.3% reading (revised from 73.6%). The market was expecting a more muted fall to 72.4%. Capacity utilization is now at its lowest point since February 1983 and not far from its all-time low of 70.9 recorded in December 1982. We expect that the excess capacity created by the fall in capacity utilization from its cyclical high of 81.4% will have a disinflationary impact on the core inflation rate closely watched by the Fed.

Today's data readings reinforce our expectation that the U.S. economy will continue contracting through the first half of 2009. U.S. economic growth should, however, turn positive in the second half of this year, spurred by expansionary fiscal and monetary policy. On the fiscal policy front, both the U.S. House of Representatives and Senate passed the US$787-billion stimulus package, which President Obama signed into law yesterday. However, even with the mild recovery expected later this year, we anticipate that the Fed will leave its target Fed funds rate in the current 0% to 0.25% range throughout this, and much of next, year in an effort to put the economy on a firmer growth path and ensure that the recovery picks up pace in 2010.

RBC Financial Group


The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.