What January's industrial production data says about the state of the economy

Retail sales were the big story on Wednesday, but the January readings of U.S. industrial production and producer prices also provided important insights into the economy.

The big picture: Industrial production rose by 0.9% month over month, following a downwardly revised 1.3% gain in December, and is rapidly approaching levels seen before the pandemic.

• However, the growth in production was well below the growth in retail sales, suggesting that either the increase is coming entirely from inventory reductions or exports.
• The pickup in U.S. imports and Chinese exports in recent months suggests it is the latter, and combined with supply constraints and bottlenecks in Asia could weigh on overall U.S. growth.
• U.S. capacity utilization has bounced back from its pandemic lows but is still at its lowest rate since February 2017.

The Producer Price Index rose 1.3% last month over December, the biggest gain since December 2009 when the government revamped the series. Producer prices rose 1.7% over January 2020 — strongly beating expectations of a 0.4% month-over-month gain and 0.9% annual gain.

Be smart: Taken together, the data tell a story of demand returning but supply not quite keeping up, meaning prices rise.