Wednesday, October 18, 2017

Underlying industrial production trend ex-hurricanes remains positive

 - by New Deal democrat

A few weeks ago, I suggested a hurricane workaround for industrial production. That approach was to average the four regional Fed indexes excluding Dallas, and add the Chicago PMI, and finally discount for the unusual strength this year in these regional indexes vs. production.

Here was my conclusion:
The average of the 5 is 22.9.
Dividing that by 5 gives us +.5.
Subtracting .3 gives us +.2. 
We can be reasonably confident that underlying trend in industrial production in September, despite the hurricanes, has been positive.
That approach was borne out yesterday when overall September Industrial Production was reported at +0.3%, with manufacturing production up +0.1% as shown in the graphs below.:

First, here's the longer term view,. Note that the decline in 2015 was due to weakness confined to the Oil Patch:

Here is the close-up of this year:

That's the good news.  The bad news, of course, is that even with this improvement, the big (revised) August decline of -0.7% in production, and -0.2% in manufacturing has not been overcome, and production is still below where it was this spring.

If we were to apply the same workaround for August as we did for September, however, the forecast would have been a manufacturing reading of +0.2% for that month as well.  That would be enough to put us slightly above where manufacturing production was earlier this year.  Indeed, the Fed suggested that but for the hurricanes, September would have been +0.25% higher.

So despite the softness in industrial production the past few months, I believe the overall trend remains slightly positive and not suggestive of any underlying downturn in the economy.

-- From Bonddad

Something to remember about industrial production is that, this cycle, it is the weakest coincident indicator.  Consider the following two charts:

The top chart shows the overall industrial production index, which peaked in the first half of 2014, dipped and has since risen a bit.  But it is still about the same level as the last expansion's peak.  The bottom chart explains why.  When we break the index down into market groups, we only mining (above in green) has done well.  Manufacturing (in blue) and electricity production (in red) have been trending sideways since early 2012.