- by New Deal democrat
This week we got three significant updates about the state of goods production in the economy: industrial production this morning, and total business sales as well as the New York and Philly manufacturing indexes earlier this week. Let’s look at each of them.
Industrial production, one of the four important monthly series that the NBER looks at in determining whether the economy is expanding or contraction, has been on an upward trend since last year, and that continued in August, although the monthly numbers were decidedly mixed. Headline production (blue) was unchanged at its post-pandemic high, while manufacturing production (red) declined -0.3%. Meanwhile, electric and gas utility production (gold, right scale), which is most closely aligned with AI data center construction, increased 1.8%. The below shows all three normed to 100 as of just before the pandemic:
Utility construction has outpaced the manufacturing sector as well as the headline number in the past few years, and continued to do so last month. Indeed, on a YoY basis, while headline production was up 1.7%, but its manufacturing component only up 0.3%, utilities have increased sharply, by 10.9%:
So the big news from industrial production is that AI data center construction continues to be the centerpiece of the manufacturing rebound since last year.
A similar continuation of trends, both good and bad, was apparent in the NY and Philly manufacturing indexes. Here is the average of the headline number for both indices (blue) and the more leading new orders component (red):
This month the headline average was 22.7 and the new orders average was 15.6 [note that these are diffusion indexes where any value above 0 indicates expansion]. Although there was significant month over month deceleration, the three month averages continue to be close to their averages during the post-pandemic Boom in 2022. For further context, here is further context with the long term historical graph:
In particular the leading new goods component indicates that we should expect the manufacturing expansion to continue for the next several months.
If the good news continued this month, so did the bad news; namely, that the inflationary pulse continued as well. Here’s the historical graph of the diffusion indices of both prices paid by producers (blue) and prices received by them downstream (red):
This month prices paid showed further widespread increases, at 55.8, while prices received were also close to their highs over the past 16 months, at 29.7. As with all months so far this year, the current widespread pricing pressures on the incoming end are only partially being passed on downstream. Further, as shown in the below longer-term historical graph, this is also as bad as at any time since the turn of the Millennium, with the exception of the post-pandemic period and the gas price-driven spike during the first seven months of the Great Recession:
If our first two metrics showed a continued inflationary industrial expansion, the third, total business sales (blue)and inventory (red), updated through July indicates there may be some wobbling:
Note that these are nominal values. While sales increased 0.3% in July, inventories increased 0.8%. If we apply the PCE price deflator for July, which increased 0.2%, these are up 0.1% and 0.7% respectively. But note that sales remained below their recent May peak for the second month in a row. This is significant, because as the below historical graph (in log scale) shows, sales turn down first before inventories do:
In fact it is likely the downturn in sales and accumulating inventory which causes companies to cut back.
This may be just noise, or it could be more. I would need to see evidence of a sales slowdown in other metrics, like personal spending and the ISM reports as well as the regional Fed reports, to believe that this is more significant.
So, for now, the manufacturing rebound continues, although it is inflationary and mainly driven by AI related spending.