October Industrial Production

KEY DATA: IP: -0.1%; Manufacturing: +0.2%; Mining: -0.9%

IN A NUTSHELL:   “The manufacturing sector remains the rock on which the improving economy is being built, but it needs some help.”

WHAT IT MEANS:  The U.S. is the one shining economy in the universe of soft industrial nations.  The manufacturing sector has been critical to the continued growth and that remains the case as output rose in October.  There was a small decline in overall industrial production as mining and natural gas utility production fell sharply.  I guess no deed goes unpunished.  Cratering energy prices may be helping consumers but they are hurting producers.  Still, we cannot complain since the additional money left in wallets rather than pumped into gas tanks is coming at the best time possible – the holiday shopping season.  On the manufacturing front, output gains were pretty much across the boardThe biggest weakness was in transportation.  Vehicle assembly rates have come down with the stabilizing sales pace.  Demand may be quite solid, but it was in the 16.3 million units range for three of the past four months and that stability may be causing vehicle makers to build more cautiously.  There was also a cut back in aerospace, but I doubt with Boeing’s backlog, that will be sustained.  Improvements in technology may be helping consumers but the tech companies are having issues selling computers and output in that sector remains weak.

A second positive manufacturing report released today was the New York Fed’s Empire State survey, which showed that activity rebounded in early November after having declined in October.  The October drop was strange, having come after nine consecutive months of solid gains, so the return to growth was hardly a surprise.  It reinforces the view that the manufacturing sector is still growing solidly.    

MARKETS AND FED POLICY IMPLICATIONS: Kermit complained that it was hard to be green, but the greenback is having no problems these days.  That is occurring, at least in part, because the rest of the industrial world is not in great shape.  Indeed, Japan slipped back into recession.  Neither the Fed nor investors will likely take that news very well, especially since the rise in manufacturing activity was nothing great.  We are not talking about robust industrial output growth here.  Given the headwinds from the rest of the world, we need energy prices to stay low – despite its negative impact on output in the energy sector.   Lower energy costs feed into consumer spendable income and a really good holiday shopping season would keep the economic acceleration going.  The Fed looks at energy costs more as an economic issue than an inflation factor.  So the easing in top line inflation will not matter very much but any jump in consumer spending will.  Still, there are Fed members who are uncertain about the sustainability of a strong U.S. expansion and softening world growth and moderating manufacturing production is likely to add to those concerns.