Industrial ETFs In Focus On Strong U.S. Manufacturing Output

The most popular industrial ETF, Industrial Select Sector SPDR (XLI - Free Report) was up 1.7% on Jan 18 after data showed that factory production surged in December amid falling exports and lower global market sentiment.

Industrial production, a measure of overall factory, mining and utility output, rose at a seasonally adjusted rate of 0.3% month-over-month in December while U.S. factories, which account for a major share of U.S. total industrial output, increased 1.1% last month—registering the biggest gain since February 2018.

On an annual basis, total industrial production was up 4% in December. Data for November was revised slightly up to 0.4%. For the fourth quarter, total industrial production moved up at an annual rate of 3.8%. Capacity utilization, which indicates how much industries are producing compared to their potential, was up 0.1% to 78.7% in December, the highest reading in nearly four years.

Manufacturing output, which accounts for 12% of the U.S. economy, was at a 10-month high driven by the vehicle and car-part makers. Production levels of appliances, clothing and paper items rose in December. Mining output picked rose 1.5% last month despite the recent volatility in energy prices.

Increase in manufacturing, alongside a gain in mining output was able to offset a fall in utility output levels. Utility output fell 6.3% from November, with both electric and gas utilities posting sharp declines. Warmer-than-usual temperatures resulted in subdued demand for heating, per the Fed’s report.

Signs of Slowdown Ahead?

Per Michael Pierce, senior U.S. economist at Capital Economics, incoming survey evidence suggests that underlying manufacturing output growth is set to slow over the coming months. He added that weak demand in key export markets and appreciation of the greenback, weighing on the competitiveness of U.S. manufacturers, could cause factory output levels to fall sharply in 2019.

Lately, there have been positive developments in the trade talks between Washington and Beijing, boosting global market sentiment. If a long-term trade deal is reached by both the countries, it will be a boost to the global growth scenario and help industrial ETFs.

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