MacroScope

Lucia Mutikani contributed to this post

U.S. industrial production rose 0.4 percent in December as manufacturing rebounded at its strongest pace in a year. For the fourth quarter, output climbed at an annual rate of 3.1 percent, increasing for the 10th consecutive quarter. But with Europe expected to slide into recession in the first half of the year, times could get tougher.

Manufacturing has been one of the main drivers of growth in the U.S. economy since the end of the 2007-2009 recession. The economy is expected to have expanded at an annual pace of at least 3 percent in the fourth quarter.

Paul Dales of Capital Economics, makes the bearish case:

The industrial sector is not going to save the overall economy from another year of pretty weak economic growth. To start with, as industrial production makes up just 15% of overall GDP, the sector is just too small to compensate for the continued weakness in other parts of the economy.

Moreover, industrial activity may have recently been supported by a number of temporary factors that are now on the wane. The growth of industrial production has recently been driven by rapid rises in business equipment output, which is at least partly related to the accelerated depreciation investment tax allowance that expired at the end of last year.

In addition, argues Dales, the winds of currency markets have been blowing in America’s favor, but potentially not for long.

Industrial production may have been boosted by the previous fall in the dollar. (While) the relationship between changes in the dollar trade-weighted index and industrial production is far from perfect, the 10% fall in the dollar seen in the first half of last year should have at least helped.

More recently, however, the dollar has strengthened and against a basket of currencies it is at a higher level than a year ago. What’s more, the dollar is probably more likely to strengthen further, at least against the euro, than fall back.

Without the effects of a lower dollar, a good deal of the performance of U.S. manufacturers will be determined by the strength of activity overseas. Our forecast that the euro-zone is on the cusp of a potentially deep recession and that growth in Asia will slow is consistent with a sharp easing in world GDP growth.