Wednesday, June 19, 2013

US Industrial Production Slowdown

The latest contraction in the ISM manufacturing report indicates the US manufacturing sector is slowing.  There have been signs this was happening for the last few months.  First, we've seen weak readings from some of the regional manufacturing reports.  For example, here is the latest Empire State report:

The May 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers declined marginally. The general business conditions index fell four points to -1.4, its first negative reading since January. The new orders index also edged into negative territory, and the shipments index fell to zero. The prices paid index declined eight points to 20.5, indicating a slowdown in selling price increases, while the prices received index was little changed at 4.6. Employment indexes were mixed, showing both a modest increase in the number of employees and a slight decline in the length of the average workweek. Indexes for the six-month outlook were generally lower, suggesting that optimism about future conditions had weakened.    

And  the latest Philadelphia Fed Report:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 1.3 in April to -5.2 this month. The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings (see Chart). The number of firms reporting decreased activity this month (29 percent) edged out those reporting increased activity (24 percent).

Richmond also shows a slowdown:

In May, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — gained four points settling at −2 from April's reading of −6. Among the index's components, shipments recouped seventeen points to 8, the gauge for new orders slipped two points to finish at −10, and the jobs index subtracted six points to end at −3.

 We also see this slowdown in the overall industrial production numbers coming from the Federal Reserve.

The above chart breaks the US down into market groups.  In 4 of the last 7 months we've seen weak readings from the final products and non-industrial supplies sector.    Non-durable goods have printed weak readings in 3 of the last 7 months, and non-energy has printed weak readings in 2 of the last 3 prints.

Let's look at the anecdotal reports from the latest ISM report to get some more insight into this section of the economy:
  • "Customers are anticipating resin price decreases and holding back orders." (Plastics & Rubber Products)
  • "Slight uptick in overall business but not substantial." (Textile Mills)
  • "Government spending has tightened, which has moved out program awards and caused some reduction in force." (Computer & Electronic Products)
  • "Market outlook is relatively flat, with some promise of raw materials inflation relaxing." (Electrical Equipment, Appliances & Components)
  • "General economy seems sluggish and pensive. Buyers are not buying much beyond lead times." (Fabricated Metal Products)
  • "Downturn in European and Chinese markets is having a negative effect on our business." (Machinery)
  • "We are having a difficult time hiring skilled employees." (Transportation Equipment)
  • "Business continues to increase, but over the past 20 days we have seen the trend flatten." (Furniture & Related Products)
  • "Market was holding strong until mid-month — then softened." (Wood Products)
  • "Decline in sales for FYQ2 over same period a year ago due to softer demand [in] both domestic and exports." (Chemical Products)
Summing up the information we get the following points:
  • The overall domestic economy is "sluggish and pensive" with a "flat' outlook and some markets have recently "softened."  Cuts to government spending are having an impact.
  • The international slowdown is also hurting.  
In addition, consider the excess capacity in the system:

In another sign of recent weakness in the manufacturing sector, capacity utilization in the US has stalled, as demand remains soft. US industries are producing significantly below their capacity and "5.5 percentage points below long-run average" according to the Fed. We are certainly far under the 82-85% level at which economists believe that the traditional measures of inflation are expected to rise.
The sky is not falling.  But things are definitely grinding lower.