October Industrial Production

KEY DATA: IP: +0.1%; Manufacturing: +0.3%; Business Equipment: +0.8%

IN A NUTSHELL: “The manufacturing sector is hanging in there, helped by improved business spending.”

WHAT IT MEANS: Were reports of the manufacturing sector’s demise a bit premature? Maybe. Manufacturing production was up solidly in October and that marks five straight months of good gains. The details tell a generally favorable story as most of the different industrial sectors and commodity groupings posted gains. But the data still were somewhat mixed, especially when you look at critical sectors. A variety of sectors posted strong increases in output, led by machinery, metals, aerospace, oil and gas drilling, furniture and textiles. A major fall off in vehicle assembly rates, a flat high tech and a drop in equipment and appliances offset some of the gains in the other portions of the sector.

Supporting the view that conditions remained solid as we moved into November was the report by the Kansas City Fed. After faltering in October, it rebounded sharply in November. This was in contrast to the moderation in activity that the latest Philadelphia Fed showed. However, the KC Fed’s index had declined for five consecutive months, so it isn’t clear if the November number was the start of a new, upward trend or just a usual periodic bounce in a longer-run downward trend.

MARKETS AND FED POLICY IMPLICATIONS: Manufacturing appears to be neither accelerating nor faltering. That is good news as the current level of activity is quite high. Maybe the best piece of data was the large rise in machinery spending. We have been waiting for firms to put the tax cuts to use to expand productivity and capacity and maybe that is finally happening. But I have expressed that hope before, only to find that capital spending didn’t pick up very much. So let’s wait and see. As for investors, the earnings reports have been strange as there have been a number of high profile misses. Firms are also becoming more conservative in their expectations, which should be taken as a sign they are seeing growth moderate. One thing we are not seeing are any indications that there was any acceleration in growth from the summer and that points to a slower GDP growth rate in the final quarter of the year. Growth should be good enough, though, to sustain rate hikes.