WASHINGTON, (Reuters) – The unexpected drop in U.S. factory production in December was due to a decrease in motor vehicle plant output amid a global shortage of semiconductors.

According to the Federal Reserve, manufacturing output decreased 0.3% after rising 0.6% last November. Reuters polled economists to forecast 0.5% increase in factory production. The output grew 3.5% over December 2020.

As long as the demand remains high, manufacturing, which makes up 11.9% of America’s economy, continues to be supported by small inventories. However, COVID-19 has led to overstretching supply chains and a recovery from the pandemic. This has triggered inflation.

The fourth quarter saw an increase in manufacturing production of 4.9%, after rising to 4.0% during the July-September quarter.

After rising 1.7% in November, production at automobile plants fell 1.3% last month. About 6% less motor vehicle output than it was a year earlier.

Industrial production fell 0.1% last month due to a decline in output and a 1.5% drop in utilities. This follows a November gain of 0.7%. Unseasonably warm December weather, which slowed heating demand, led to utilities being undercut.

The 2.0% increase in mining production was a good sign. The fourth quarter saw an increase in industrial production of 4.0%. This was compared to a 3.5% increase recorded in the previous quarter.

The manufacturing sector’s capacity utilization, which measures how well firms use their resources in a given period, fell 0.2 percentage points to 77.0% last December. The overall capacity utilization for the industrial sector fell 0.1 percentage points to 76.5% in December. This is 3.1% less than the average for 1972-2025.

Officials at the Fed tend to look at capacity use measures for signals of how much “slack” remains in the economy — how far growth has room to run before it becomes inflationary.