Wednesday, June 17, 2015

The shallow industrial recession continues - but no signal for general growth

 - by New Deal democrat

Several days ago May industrial production showed another decline.  The consensus in the commentary was that this was due to continued weakness in the Oil patch and strength in the dollar.  I agree.   James Picerno also had a nice, lengthy article explaining why this ongoing decline isn't enough to be a recessionary red flag.  I agree with that too.

But it is worthwhile to show why Picerno, and the consensus, are correct, by comparing the various sectors of production, and comparing the current weakness in production with past episodes of weakness.

First, let's look at the sectors that make up the industrial production report.  In the graphs below they are manufacturing (red), mining (blue), and electricity (green).  Here's the overall look on the Q/Q% change for the last 20 years:

What I mainly want you to  notice in the above is how erratic the electricity sector is.  Current readings are no more erratic.  So let's take that out and just focus on mining and manufacturing:

While manufacturing has shown a little weakness, the biggest difference by far is in mining -- and that's where the Oil patch weakness shows up, as well as coal and metals production for export (recall how awful rail and steel have been in the Weekly Indicators for the last 4 months).

Now let's compare the present weakness with past episodes.

Here is the Q/Q% change in overall industrial production in the period from 2000 to the present, ending with Q1:.i

Note the decline in Q1 was less than -0.2%.  That's considerably less not only than prior declines associated with recessions, but even with declines where no recession occurred.

Now here is the same graphs for the 1950s and 1960s, and then the 1970s and 1980s (there was no period of weakness in the 1990s!):

Again, note that the Q1 decline in industrial production was almost trivial compared with other declines whether or not associated with prior recessions.

Finally, let's look at the recent m/m% change, to include April and May:

So far the decline in Q2 is a little bigger than that in Q1.  But still not enough to compare with past episodes of weakness that were associated with recessions.  In short, this shallow industrial recession is not derailing the robust overall economy.