KEY DATA: IP: -0.1%; Manufacturing: -0.4%; Vehicles: -7.6%
IN A NUTSHELL: “If you believe that vehicle production is crashing, I have a bridge for sale and you can buy as much of it as you like.”
WHAT IT MEANS: One of my more common warnings is that the headline number hides what is truly going on and the devil is in the details. Well, welcome to the August industrial production report. Output fell in August for the first time since January, and we know what the weather did to everything that month. Worse, manufacturing production was down sharply. So, has the industrial sector finally come to a grinding halt? Yeah, right. The biggest decline was in vehicles, where assembly rates dropped by nearly 12%. Of course, the pace of new vehicle construction had surged by almost 13% in July, highlighting the problem with seasonal adjustments when trends change. The important point is that vehicle sales in August hit their highest level in 8½ years, so output is likely to expand further. It is clearly not shrinking. Indeed, the 3-month assembly rate average was the highest since early 2006, when the housing bubble was funding everything that moved and didn’t move. Meanwhile, the rest of the economy was doing just fine. Production of high tech products, consumer products, business equipment and business and construction supplies were all up.
Adding to the belief that the manufacturing sector is in great shape was the September Empire State Manufacturing Survey, a product of the New York Federal Reserve Bank. The index hit its highest level in almost five years as new orders surged, hiring jumped and backlogs built. Enough said.
MARKETS AND FED POLICY IMPLICATIONS: It is sometimes good to get a headline that is so obviously misleading as today’s industrial production number. It is not that the data are wrong; it is just that sometimes the marquee number is not reflective of what is actually going on. The data are often volatile and the seasonal adjustments sometimes don’t work right if conditions change. That was true with today’s industrial production decline and was likely the case with the weak August employment report. Basically, the manufacturing sector is strong and should continue to lead the way. The FOMC starts its 2-day meeting tomorrow and on Wednesday Janet Yellen will hold a press conference. I expect the statement and the discussion to focus on changing the thinking from rates staying low an extended period to the strategy that the data will drive decisions. If the numbers are stronger than projected, the Fed will be prepared to move sooner than expected. This report changes nothing and investors will have to start getting used to the reality that the Fed is going to raise rates, most likely during the first half of next year.