Industrial Production & Manufacturing - 10 Year Highs

Month over month industrial production growth was 0.1% in October. It missed estimates for 0.2% growth. September’s growth rate was revised from 0.3% to 0.2%. It’s not a great sign to see month over month growth miss estimates when the prior month was revised lower.

The good news, which the chart below shows, is industrial production growth was 4.1% year over year. Overall industrial production is at a 10 year high.

The bulls claim this proves the economy isn’t in recession mode.

However, it’s important to point out many bears such as myself believe the odds of a recession in the intermediate term have increased. That doesn’t mean many facets of the economy can’t grow strongly now.

Manufacturing growth was 0.3% month over month which met estimates. And it was faster than the 0.2% growth rate in September.

Manufacturing was up 2.7% year over year and also hit a 10 year high. The big question about manufacturing is how it will deal with weakening global growth and lower oil prices.

We saw the Philly Fed index signal growth will be weak in November. Empire state index show growth was strong. Both had strong capex indexes.

Personally, I think these metrics will fall after the tariffs go into effect in 2019. There are some areas where trade is boosted right before tariffs are implemented.

Businesses try to front-run the cost increases.

Finally, as the chart above shows, the capacity to utilization rate fell from 78.5% to 78.4% which beat estimates for 78.2%. The original September reading was 78.1%.

Cycle peak was 79.6%. This implies there’s plenty of headroom to increase industrial production in the near term. That would be a worry next year if industrial production growth continues. But I don’t think it will.

Mining capacity fell 0.8% to 92.7%. Utilities capacity fell 0.5% to 77.3%. Manufacturing capacity was up 0.1% to 76.2%.

Industrial Production Report Details

Utility output was down 0.5% month over month partially. Hurricane Michael caused 1.7 million power outages in 6 states. Mining volumes fell 0.3% month over month and were up 13.1% year over year. Utility production was up just 1.7% month over month.

There could be a boost in utilities in November because of the bitter cold weather in the northeast.

Production of business equipment was up 0.8% month over month. Production of construction supplies was up 0.6%. The increased production of business equipment suggests there might be a rebound in business investment in Q4. But obviously, this is only one month of data.

Growth in construction supplies signals there is demand for construction materials which have been in short supply.

The two weakest parts of manufacturing in this report were motor vehicles and hi-tech which fell 2.8% and 0% month over month.

Industrial Production - Are Oil Prices A Problem?

The big issue in the short term for industrial production is the decline in oil prices. This affects mining and oilfield machinery production.

In this cycle, 70% of industrial production growth was caused by growth in oil-related line items. In the intermediate term, the economic cycle will direct industrial production.

As you can see from the chart below, mining and oilfield machinery as a percentage of non-residential investment in equipment is much lower than it was in 2014.

This implies the recent oil crash won’t hurt industrial production as much as it did in late 2014 and 2015. I contend that low oil prices are good for the economy because they lower costs. The energy sector doesn’t employ that many workers.

Problem with low oil prices is they signal the global economy is weak. A most interesting part of this report is that American industrial production growth subtracted by emerging market industrial production growth is the highest since the Asian financial crisis.

Usually, industrial production growth is much quicker in emerging markets than in America.

Industrial Production - Quarterly Services Report

The Q3 advanced quarterly services report showed there was 1.2% growth in information revenue. That was much less than the 3.6% growth in Q2.

On a year over year basis, growth was 8.7%. This was up from 8.6% in Q2. Information sector revenue is now $426.8 billion. Obviously, this sector isn’t going away just because the FAANG stocks have fallen.

Industrial Production - Strong Kansas City Fed Report

Just like the Empire Fed report and unlike the Philly Fed report, the November Kansas City Fed survey showed strength.

On a month over month basis, the index increased from 8 to 15 and on a year over year basis, the index fell from 45 to 40. Monthly production was up from 5 to 24. Volume of shipments and new orders were up from 14 to 31 and from 7 to 20.

This report showed inflation became more of a problem unlike the other two.

The prices received index was up from 19 to 23 and the prices paid index was up from 33 to 41. The expectations index was weak as the composite and production indexes fell from 21 to 16 and from 37 to 27. The capex index rose like the other reports as it was up from 14 to 23.

This report includes useful comments to explain the changes to the data.

One firm stated, “The 4th Quarter is looking good. If the weather stays cold, we should see a strong finish to our year. We are feeling good about the future.”

This supports my point earlier about how November has been unseasonably cold. Another firm stated, “At this stage of the economic expansion, labor availability and the uncertainty around tariffs are the significant but manageable problems we face.”

Industrial Production - Tariffs Are Going to be a Big Issue Next Year. 

They will start to impact consumer products. The manufacturing sector is facing a labor shortage. There are labor shortages for jobs that don’t require an education.

Also, there are plenty of people willing to work jobs that require a college degree. It would be devastating if the employment to population ratio for college graduates falls in the next recession since it didn’t recover in this expansion.