Why the drop in industrial production is actually good news

Industrial production fell much more than expected in March (-0.6% vs. -0.3%), but the weakness was driven by good news: lower oil prices and better weather.

The chart above compares industrial production in the U.S. and in the Eurozone. The U.S. has registered a staggering amount of growth in recent years, leaving the Eurozone in the dust. One piece of good news is that the Eurozone economy is now beginning to grow again after languishing for the past five years. Production in the U.S. has been soft (down 1%) for the past four months, however. Is this the beginning of another economic downturn? No, and here's why:

The chart above is the oil and gas well drilling subcomponent of the the industrial production index. It's down 40% in the past four months, and the Baker Hughes U.S. rotary rig count is down 50% over the same period. The huge decline in oil and gas drilling activity is directly attributable to the 50% drop in oil prices that began last summer. The world now enjoys a glut of oil and sharply lower oil prices, and that's great news. We can now devote more of our economy's scarce resources to the production of other, more useful things.

The chart above shows the utility subcomponent of the industrial production index. March weather was much better than February's, with the result that the output of the utility industry fell almost 6% in March. That's more good news.

Manufacturing production (which excludes utilities), shown in the chart above, was up in March and is only down 0.7% in the past four months. That could easily be attributable to the west coast port slowdowns, but in any event is in keeping with the normal historical volatility of this index. It's still up 2.4% over the past year.

Business equipment production, shown above, was also up in March and a little soft in recent months, but not by a significant amount. It's still up 3.2% in the past year, which is a bit more than overall GDP growth.