Tuesday, October 19, 2010

Industrial Production Drops .2%

First, this is an issue I examined over the last few weeks. I looked at manufacturing and concluded the following:
The overall slowdown in durable goods orders indicates the manufacturing sector is slowing. However, the overall ISM readings and numbers from the Midwest should be enough to keep manufacturing from contracting at a strong rate. I think these numbers indicate a level right around 0 is the worst case scenario going forward.
I also noted this:
Manufacturing is clearly slowing. While the overall national numbers are still showing growth, they are just barely positive. The good news here is a cheap dollar should help exports, which -- along with the strong growth in emerging economies -- should prevent this sector from falling into the abyss. But the slowdown across the entire Eastern seaboard indicates this sector is taking a hit from decreased demand somewhere.
Yesterday's drop in IP indicated the slowdown is continuing.
Industrial production decreased 0.2 percent in September after having increased 0.2 percent in August. The indexes both for manufacturing and for manufacturing excluding motor vehicles and parts also moved down 0.2 percent in September. Production at mines moved up 0.7 percent, while the output of utilities fell 1.9 percent. For the third quarter as a whole, total industrial production rose at an annual rate of 4.8 percent after having advanced about 7 percent in both the first and second quarters of this year. The index for manufacturing decelerated sharply in the third quarter: After having jumped at an annual rate of 9.1 percent in the second quarter, factory output gained 3.6 percent in the third quarter. At 93.2 percent of its 2007 average, total industrial production in September was 5.4 percent above its year-earlier level. The capacity utilization rate for total industry edged down to 74.7 percent, a rate 4.2 percentage points above the rate from a year earlier but 5.9 percentage points below its average from 1972 to 2009.
Here is a chart of the data:

Notice the index for IP has been increasing for over a year. In other words, the overall trend is still up. However, as noted above, there are signs of a slowdown.

Above is a chart of capacity utilization, which also shows a strong rebound from the lows of the recession. However, the overall level is still very low and the last month of data produced a sideways move.

Let's break the data down by market groups (from the report):

The output of consumer goods declined 0.4 percent in September.

The index for consumer durables decreased 0.9 percent.

Within durables,

the output of automotive products fell 1.0 percent,

the index for appliances, furniture, and carpeting dropped 1.9 percent after a similarly sized decline in August, and

the production of miscellaneous goods declined for a second consecutive month. The output of home electronics rose 0.6 percent.

The above chart of auto and light truck sales shows that demand has rebounded somewhat, but not as strongly as we would like. It also shows the pace of purchases has been more or less constant for the last approximately six months.

Obviously, the slowdown in the housing market is having a very negative impact on the household furnishings market.

But, overall, production of consumer goods took a hit last month. However, let's look at the data:

Notice the overall trend is still up. In addition, we've seen several 1-2 month drops over the last year and a half without making the overall trend move lower.
The production of nondurable consumer goods moved down 0.2 percent; a fall of 1.9 percent in the energy category, which primarily resulted from a decrease in the index for residential utilities, more than offset an increase in the non-energy category. Within non-energy nondurables, the indexes for foods and tobacco and for clothing moved up, while the indexes for chemical products and for paper products moved down. The output of consumer goods increased faster in the third quarter than in the second quarter, a pickup that reflected unusually strong summer sales by utilities and a jump in the output of consumer automotive products.
The non-durable slowdown was caused by a drop in utility output. This shouldn't be surprising considering the summer is now over. The overall output in consumer goods is interesting, although utilities are a part of that. However, car sales were also a contributor, which is encouraging.

Let's move onto business output.
The output of business equipment edged up 0.1 percent in September and was 10.1 percent above its year-earlier level. The index for transit equipment advanced 1.8 percent and offset a decline in the production of information processing equipment; the output of industrial and other equipment was unchanged. For the third quarter, the output of business equipment rose at an annual rate of 9.8 percent. This increase was slower than in the second quarter due to substantial decelerations in the indexes for information processing equipment and for industrial and other equipment. In contrast, the output of transit equipment jumped at an annual rate of 33.4 percent in the third quarter after having fallen the previous two quarters.
First, note that overall, business equipment printed a strong number, albeit weaker than the previous quarter. In addition, the slowdown was caused by a drop in information processing equipment and industrial and other equipment. Here is a chart of overall business production:

Notice the overall trend is still higher, although the pace of the increase is still lower.

The index for defense and space equipment declined 0.2 percent in September after a 0.5 percent decrease in August.

The production of construction supplies retreated 0.8 percent in September after having advanced 1.1 percent in August. The index for business supplies decreased 0.9 percent in September, with declines in both the energy and non-energy categories.

In September, the production of materials was unchanged from August. A decrease in the output of durable materials offset increases in the indexes for nondurable materials and for energy materials. The decrease in durable materials was its first decline since June 2009, and the indexes for all of its major categories moved down. For the third quarter as a whole, the output of materials rose 4.9 percent, somewhat less than the 7.5 percent advance recorded in the second quarter; relative to the second quarter, slower increases in durable materials more than offset faster gains for nondurable materials and for energy materials.

For a better gauge of construction materials, keep an eye on lumber futures; that's where the first big moves for a housing rebound should occur.

The conclusion from yesterday's report is the same as a few weeks ago: manufacturing is slowing. However, I still think that the worst we'll see is production floating around 0.