By John L. Chapman, Ph.D. Washington, D.C.
The Federal Reserve Board released September’s Industrial Production and Capacity Utilization reports this week, and the data were mixed:
Industrial production increased 0.2 percent in September after having been unchanged in August. Previously, industrial production was reported to have stepped up 0.2 percent in August. For the third quarter as a whole, industrial production rose at an annual rate of 5.1 percent. Manufacturing output moved up 0.4 percent in September after having gained 0.3 percent in August. Production at mines advanced 0.8 percent in September, while the output of utilities decreased 1.8 percent. At 94.2 percent of its 2007 average, total industrial production for September was 3.2 percent above its year-earlier level. Capacity utilization for total industry edged up to 77.4 percent, a rate 1.7 percentage points above its level from a year earlier but 3.0 percentage points below its long-run (1972–2010) average.
However, unpacking the data and examining the details, the picture is brighter: industrial production in the U.S. is up 3.3% in the past year, and 5.6% in the past 3 months. Automobile production is now up 6.8% year-over-year and supply-chain problems from earlier in 2011 have been ameliorated; total industry production is now back to an annual pace of 13 million units, a far cry from the 17.5 million of five and six years ago but well above the 10+ million average between 2008-2010. Except for the utility sector, all industrial sectors reported gains last month, led by business equipment at over 10% in the last 12 months. As stated above, capacity utilization is back up above 77%, though still below its 80% plus historical average.
Near term implications:
There is not even a hint of a recession in this full report: almost uniformly (by which we mean, we are not aware of a case where the contrapositive has occurred, and know one did not, in the Federal Reserve era), both production and capacity utilization data fall right at the beginning of a downturn (see graphic below). There is no hint of that here. Both new orders and hiring indicators were up in September as well, and it is possible that the deep emotionally-driven pessimism of the current business climate, so dominated by what might happen in the Eurozone, may give way to better output and employment data in manufacturing and assembly in the months ahead. If so, we feel lean manufacturers with multinational distribution are poised to benefit in the next several months [e.g., Ford Motor (F) and Cummins Engine (CMI)], and indeed, years, as we expect systematic dollar weakness to continue indefinitely.
But there is a longer term warning. Per the Industrial Production Index below, the post-recession recovery to peak for manufacturing is soon to be the slowest since the Depression (except for war conversion), and 2007 output productivity may not be matched until 2015 at this rate. This has seriously negative consequences for real incomes in manufacturing, already down 1.9% in the last 12 months. We continue to yearn for pro-growth policy out of Washington that would include incentives to recapitalize this sector based on certainty and sustainability of future demand.
Chart I: Industrial Production Index (Historical: 1918-Present)
Disclosure: Alhambra Partners currently has no long positions in either Ford Motor Co. or Cummins Engine Inc.
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, John Chapman can be reached at john.chapman@alhambrapartners.com.
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