The Fed's Own Data Show U.S. Manufacturers Don't Share Its Optimism

Factories are cutting expansion plans just as the Fed sees stronger growth

Tucked away in last week's report on industrial production from the Federal Reserve was an important piece of news: Manufacturers, miners and utility companies don't seem as optimistic as monetary policy makers are that 2015 will be a markedly better year for the economy.

Industrial producers are scaling back their expansion plans for this year even as Fed officials forecast faster economic growth. Since less investment is often interpreted as diminishing confidence for future demand, the two outlooks are a little hard to square.

Industrial companies will raise capacity by 1.8 percent in 2015, the smallest increase since 2011, after boosting it 3.1 percent in 2014, the Fed said in its Feb. 18 release on production.  

The central bank's projections are based on an amalgam of information from trade associations and its own forecasts. They are carried out separately from the economic forecasting process undertaken by staff for the central bank's Federal Open Market Committee.

The projections are important nonetheless because they provide a clue to companies' capital spending plans, a key component of gross domestic product. Such outlays by industrial companies accounted for more than a third of business investment in 2013, according to the Census Bureau.

The slowdown in expansion plans is surprising in that companies are running their factories and plants closer to full capacity than before. Those facilities operated at 79.4 percent of capacity in January, up from 78.1 percent a year earlier, based on data from the central bank. 

The steepest reduction in spending intentions is coming in the mining industry, which includes oil producers sideswiped by tumbling prices. Miners will raise capacity by 3.3 percent in 2015, after expanding it 9.2 percent in 2014, the Fed said.

Manufacturers also are scaling back their expansion plans, expecting a 1.7 percent advance this year, the smallest since 2011, from a 2.2 percent gain in 2014.  So too are utilities, to a 0.3 percent increase from a 1 percent rise in 2014.    

Most Fed policy makers are forecasting that economic growth will accelerate, not decelerate, this year, to 2.6 to 3 percent, from 2.5 percent in 2014, according to material released by the central bank on  Dec. 17.   Judging by the estimates of capacity that central bank staffers came up with, the policy makers might well have to curb that enthusiasm in the future.