Category Archives: Industrial Production

March Industrial Production and April Home Builders Confidence

KEY DATA: IP: -0.6%; Manufacturing: +0.1%/ Home Builders Index: 56 (up 4 points)

IN A NUTSHELL: “Manufacturing is starting to come back and with developers pretty optimistic, the outlook for spring economic activity is becoming a lot brighter.”

WHAT IT MEANS: Spring is here and guess what? Builders have smiles on their faces once again. The National Association of Home Builders/Wells Fargo Housing Market Index jumped in April. It is nearing levels that would be consistent with pretty strong home construction. Expectations about current and future sales were up sharply. I have little doubt that the warmer weather is heating things up. Don’t be surprised if the February housing start collapse is totally wiped out in March. I expect housing activity to get back to 2007 levels by the end of spring.

While April may be the month the economy flowers, March continues to growl. Industrial production fell sharply in March, but the major reason was a cut back in utility activity as the winter started to break and a major reduction in oil and gas production, which we all knew was coming. As for manufacturing, output did rise, but only modestly. But vehicle assembly rates have bounced back and business equipment production was up, so there seems to be some signs that conditions are firming. That said, the New York Fed’s manufacturing index tanked in early April, so we need to be cautious before we say that the industrial sector is getting back up to speed.

MARKETS AND FED POLICY IMPLICATIONS: We still have quite a few more March numbers before we get the spring data, so don’t expect the reports that are coming out to be great. The winter hurt but we just don’t know how much and we may have to wait about two more months before we have a clearer picture of the economy. That, of course, brings us to June, so it is looking like a rate hike that month is becoming unlikely – as much as I don’t want to admit that. While two great employment reports and an acceleration in wages could bring that month back into play, the Fed probably wants to soften up the beaches for a rate hike and there may not be time to do that. As for the markets, investors have earnings to deal with and rate hikes to put out of their minds, even if the Fed is highly likely to move within the next six months. Failing to plan for that is done at your own peril.

December Consumer Prices, Real Income and Industrial Production

KEY DATA: CPI: -0.4%; Excluding Energy: 0%; Food: +0.3%/ Real Earnings: +0.1%/ IP: -0.1%; Manufacturing: +0.3%

IN A NUTSHELL:   “Falling prices may worry some but households are ecstatic and manufacturers are gearing up to meet the growing demand.”

WHAT IT MEANS:  Horrors of horrors, energy prices are falling.  If you watch the business news, that is what you would think.  With another sharp drop in gasoline, the Consumer Price Index posted its largest decline in six years.  So, should we worry?  Not really.  Excluding energy, prices were flat and over the year, non-energy costs were up nearly 2%.  That is not deflation.  The December report was really odd.  There were a large number of components that posted outsized changes.  Apparel and used vehicle prices fell by over 1% while medical goods and energy services rose 1%.  Just about every major category was either up or down by 0.2% or more and that is not a normal pattern.   As for deflation, don’t tell that to people who have to spend a lot of their money on food and utilities.  Those costs were up solidly.  My suggestion: Stop looking at the headline number because when oil turns around, and it just might be starting to do that, the sign will simply change even if the magnitude doesn’t.

Real earnings rose modestly in December and that is distressing.  When prices fall sharply, if all you can get is a small rise in spending power, there are real problems out there.  This economy would be a lot better off with a little more money going to workers.

It will take additional quarters of strong growth to get to the point in the labor market where businesses will have to start raising wages faster and that growth is likely to occur.  Industrial production fell in December but a warm December (hoorah!) caused utility output to tank.  Meanwhile, manufacturing production rose solidly once again, despite a small pull back in vehicle assembly rates.  The University of Michigan’s mid-month reading of consumer sentiment rose to its highest level in eleven years.  It’s almost as if happy days are here again. The lower gas prices are going to wind up in the economy and better wage gains could trigger robust consumption.

MARKETS AND FED POLICY IMPLICATIONS: The economy is growing solidly and households are a happy bunch of campers once again, so it looks like 2015 should be a really good year.  Strong growth, coupled with oil price stability or even increases, will make people forget the idea of deflation and turn to the more important issue: When will the dam that is holding back wage gains break?  Normally, labor shortages lead to rising wages, which begin slowly once the inability to find workers starts appearing.  That is not happening this time.  Instead, we are creating the next “bubble”, which is the pent-up demand for higher wages.  The longer we go without slowly raising wages, the greater the surge will be.  The Fed may think it has time because labor compensation growth is largely non-existent.  But if my view is correct, when the capitulation occurs, wages will jump, catching the Fed with its rates down.

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 board.  The 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.

September Industrial Production and Weekly Jobless Claims

KEY DATA: IP: +1.0%; Manufacturing: +0.5%/Claims: 264,000 (down 23,000)

IN A NUTSHELL:   “Manufacturing is strong and with jobless claims at the lowest level in over fourteen years, it is clear that the economy and Wall Street are in different worlds.” 

WHAT IT MEANS:  With chaos reigning in the craps table called Wall Street, we need to step back a little and start looking at the underlying economy.  The data look pretty good.  Industrial production rebounded sharply in September as utility output surged.  Manufacturing was up solidly and the increase was actually better than the headline would have you believe, and that number was pretty good.  Vehicle sector production dropped for the second consecutive month but it looks like sales and inventories are reasonably balanced, so don’t expect the declines to continue.  Manufacturing production rose at a 3.5% annualized pace during the third quarter.  In September, more consumer goods, business equipment and supplies and construction supplies was produced.  The only industry, other than vehicles, that posted a significant decline was wood products while the gains were spread across both durable and nondurable goods industries.

Supporting the view that manufacturing is improving was the Philadelphia Fed’s October Manufacturing Business Outlook Survey.  While activity eased a little, it remained at a level consistent with those posted during the solid growth periods in both the 1990s and 2000s.  Also, the percentage of firms indicating activity had declined over the month actually fell.

Maybe the best number today was the jobless claims, which came in at the lowest level since April 2000.  Adjusting for the size of the labor force, we are at record low levels for a weekly number and the four-week moving average.  Firms are just not cutting their workforces and that points to the possibility that the October employment report could be really strong.

MARKETS AND FED POLICY IMPLICATIONS: The economic reports were really good but investors decided that panic was the better part of valor.  Really people, did you think that we could keep piling up huge gains in equities when the U.S. and world economies were growing moderately at best?  The Dow and S&P peaked in mid-September.  Over the previous two years, those indices rose by 27.3% and 38.7%, respectively.  Meanwhile, GDP grew by only 4.5% between 3rd quarter 2012 and 3rd quarter 2014 (assuming a 3% growth rate this past quarter). I don’t know how many times I said it but I will repeat it again: Wall Street and Main Street have become totally disconnected.  If you use the equity markets as an indicator of the economy, you are looking at the wrong thing and the Fed should care little about Wall Street when it comes to determining a monetary policy that is best for the economy.  I am sure there will those who argue the Fed has to put off tightening so it doesn’t spook the markets even more, but that would be arguing the Fed should use a misleading indicator.  Ultimately, equity prices, earnings and the economy will be better in synch but right now, I don’t worry too much about a market correction when the data keep showing the underlying economy continues to grow decently and the pace may actually be picking up.

August Industrial Production

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.

July Industrial Production and Producer Prices

KEY DATA: IP: +0.4%; Manufacturing: +1%; PPI: +0.1%; Goods less Food and Energy: +0.2%

IN A NUTSHELL:  “With manufacturers ramping up production, it is clear the economy is accelerating, but it is doing so without any major inflation pressures.”

WHAT IT MEANS: Consumers may not be spending a whole lot of money but that doesn’t seem to matter to manufacturers.  Production surged in July and the increases were across the board.  Every durable goods and five of the eight nondurable goods sectors raised output levels.   On the consumer side, vehicle assemblies jumped 13% as sales remain strong.  But it wasn’t just what’s left of Detroit.  Output of electronics, appliances and furniture also increased solidly.  Even clothing production was up! There were some soft spots, such as food and energy, but that doesn’t change the picture.  Business goods production rose as a lot more business equipment and construction supplies were churned out.  The manufacturing capacity utilization rate hit its highest level since February 2008. 

While production may be jumping, costs are not.  The Producer Price Index rose modestly in July, helped along by a shape drop in energy costs.  Services costs rose a touch faster but than goods prices but they are still not rising sharply.  There appears to be only one area where wholesale costs are worrisome: Consumer foods.  Finished consumer food goods jumped one percent in July and are up nearly six percent over the year.  Those increases show up in the supermarket and with wages largely flat, households will have less left over after buying food to purchase other goods.

MARKETS AND FED POLICY IMPLICATIONS: Rising output and modest inflation pressures: Who could ask for anything more?  The increase in production is the result of improving economic conditions and that implies hiring should continue to improve and the unemployment rate decline.  Those are necessary conditions to shift the excess of supply in the labor market to an excess of demand and ultimately higher wages.  With producer costs tame, inflation should also continue to be fairly modest, allowing purchasing power to rise once compensation gains pick up.  The Fed members who want to keep holding the economy’s hand will look at the tame inflation numbers and say that policy can remain untouched.  The inflation hawks will say the industrial production gains argue that conditions are changing and the Fed needs to get out in front of any potential inflation pressures.  In other words, nothing will change at the Fed.  These reports, coupled with geopolitical pressures subsiding, at least a little, should put some smiles back on investors’ faces.

June Producer Price Index and Industrial Production

KEY DATA: PPI: +0.4%; Goods: +0.5%; Goods less Food and Energy: +0.1%; Services: +0.3%/IP: +0.2%; Manufacturing: +0.1%

IN A NUTSHELL:  “The rise in wholesale consumer product costs may not lead to a large rise in inflation, but the upward trend needs to be watched.”

WHAT IT MEANS: As long as inflation remains well contained, the Federal Reserve can provide unlimited support to the economy.  We have seen a steady, but slow, upward drift in the inflation rate and the June data on wholesale costs indicate that the trend will likely continue.  The Producer Price Index rose sharply but much of that came from a jump in energy costs.  We already know that the upsurge in petroleum prices has already unwound so the headline rise in July will likely be lower.  But as usual, the real information is in the details and they tell a somewhat different story.  Costs at the finished goods levels are beginning to show some real signs of rising inflation.  Finished consumer goods prices have increased by over 3% during the past year even when you exclude energy.  Finished consumer food costs have jumped nearly 5%.  While not all of those increases make their way into retail prices, a lot do and that argues for additional pressure on consumers.  Services costs, though, have been more contained, increasing just under 2% over the year.

On the manufacturing front, output rose modestly in June, but that doesn’t tell the whole story.  The industrial sector rebounded from a terrible January, posting strong gains over the next four months.  Even with the limited increase in June, manufacturing production increased at a nearly 7% pace during the second quarter.  Despite a weather-restricted 1.4% first quarter increase, manufacturing output is rising at a better than 4% pace this year and that is an indication the economy is picking up steam.  Construction activity was solid in June and the output numbers were backed up by a jump in the National Association of Homebuilders’ Index which hit its highest level since January.  The winter is finally over as far as builders are concerned.

MARKETS AND FED POLICY IMPLICATIONS:  It is hard to get worked up over any producer price report as the pathway from wholesale to retail is hardly direct and frequently goes nowhere.  But the increases in finished goods costs are a warning that the days of putting inflation in the back of our minds may be coming to an end.  We are not talking about high inflation, just rising inflation.  We have seen that in the both the Consumer Price Index and Personal Consumption Expenditure Price Index.  The CPI is now over 2% while the PCE is closing in at that level, though excluding food and energy they are still below the Fed’s target.  The Fed probably wouldn’t mind a little acceleration in inflation. It is a lot higher that they worry about.  Right now there is little reason to fret but that may not be the case in by the end of the year.  Investors will probably not think much about today’s data as they are really non-threatening.

May Industrial Production and June Empire State Index

KEY DATA: IP: +0.6%; Manufacturing: +0.6%/Empire State: +0.2 point; Orders: +8 points

IN A NUTSHELL: “With manufacturing accelerating, there is every good reason to believe that the economy is beginning to hit its stride.”

WHAT IT MEANS: So much for the winter.  Spring is just about gone and summer holds great hope that we will see consistently solid if not strong growth.  Why am I so optimistic?  The nation’s manufacturing sector is accelerating.  Output soared in May the third month out of the last four where production rose robustly.  Indeed, so far this quarter, manufacturing production has expanded at a 4.7% annualized pace and that does not assume any increase in June.  The winter collapsed activity in January and the sector has made strong progress since.  Most of the rise in manufacturing output was in the durable goods segment with vehicles, furniture, aerospace, electrical equipment and appliances as well as computers and electronic products all posting robust gains.  In addition, while most nondurable goods manufacturers slowed production, there were big gains in plastics, chemicals and petroleum products.  In other words, only nondurable consumer good firms showed weakness.  Capacity utilization hit its highest level in over six years, but in a global economy, this measure has relatively modest value.

Supporting the view that manufacturing is booming was the gain in the June Empire State Index, which is produced by the New York Fed.  This measure of manufacturing activity rose modestly but there was a sharp increase in new orders.  Hiring slowed a bit.  While optimism faded a touch, it is still at a solid level.

MARKETS AND FED POLICY IMPLICATIONS:  If the Fed is looking for signs that growth is picking up, all it has to do is look at its own data.  Manufacturing production is soaring and the improvement in the June New York Fed’s report point to the gains being sustained.  Production is rising for big-ticket consumer goods such as furniture and motor vehicles, business equipment and products, such as chemicals and plastics that go into the production of other goods.  The likelihood that manufacturing would be growing at an accelerating pace but the economy expanding weakly, is not particularly great.  It really looks like second quarter GDP could be up by more than 4%.  But it would take strong third and fourth quarter growth rates to put to rest the view that we are in a new world where growth meanders along at a 2% to 2.5% pace.  I expect that to happen, but I am in a minority, at least right now.  Though investors should love these numbers, the chaos in Iraq and the uncertainty in the energy markets could overshadow everything else.