Monday, March 16, 2009

Industrial production: not out for the count yet

The industrial production report indicates that manufacturing, mining, and utilities production is now below the average 2002 level. February industrial production fell 1.4% (consensus -1.2%), with a 0.7% cut in manufacturing output, a 0.4% slash in mining production, and a 7.7% slice in utilities. Although the report suggests further economic drag coming from the industrial sector, there is a very dim positive number that shines between the mountains of red ink.

Production of motor vehicles and parts rose 10.2% over the month. It’s not difficult pull off a double-digit monthly growth rate when production is down almost 50% off its peak; but nevertheless, for an industry that has fallen to just 3.3% of personal consumption, or 2% below its 2000-2007 average, in one little year, a nudge in the up direction is good news for growth.

However, something’s always gotta give, and in a recession it’s oil and gas well drilling, which is down 15.2% in February and over 30% off its peak in just five months. The problem here is: as production falls, so too does investment in drilling equipment and jobs. There is a growing risk to the level of capital equipment investment, hence GDP, in this sector in coming quarters.

Overall, the report suggests that there is an upside risk to economic growth: auto production. In spite of the dismal February auto sales report, 40% down over the year, the industrial production monthly bounce suggests that firms might believe it time to start re-filling auto inventories.

Rebecca Wilder

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