• Home ::
• Fundamental ::
• Analysis Reports ::
• Daily Global Commentary

• Send
• Print
• Add To
• Rss

Daily Global Commentary

768d2963-135e-4138-b4f7-71f62dd328cb

0

0

Factor Sector's Weakness – More Than Autos

Thu, May 15 2008, 21:18 GMT
by Asha Bangalore

Northern Trust

Factor Sector’s Weakness – More Than Autos

Industrial production fell 0.7% in April, after a revised 0.2% gain in March (previously reported as a 0.3% increase) and a 0.7% decline in February. Industrial production is of the one of the four variables the National Bureau of Economic Research uses to date business cycles. This index has peaked in January 2008 as can be seen in chart 1. The hefty declines in February and April are part of the fundamentally weak economic profile of the U.S. economy at present.

As a result of the weakness in production, total capacity utilization fell to 79.7% during April from 80.4% in the prior month. Factory production fell 0.8% in April, following a steady reading in March and a 0.7% decline in February. A strike and strike-related shortage of supplies were partly responsible for the 8.2% drop in motor vehicles and parts production. Excluding autos, factory production fell 0.4% in April. With the exception of information processing (+1.2%) and defense and space equipment (+1.6%), all other categories of factory production declined in April. Excluding high-tech and autos, factory production fell 0.5% in April. The overall tone of the April report suggested that production in the factory sector has shifted to a noticeably lower gear of operation.

The operating rate of the factory sector declined to 77.5% in April, the lowest since November 2004. Rhetoric from the Fed has included concerns of resource utilization and the inflationary potential of this trend. In the past two months, there has been a significant increase in the unemployment rate and a large drop in the operating rate of the factory sector. Both of these developments are compelling pieces of evidence that pressures on resource utilization are easing rapidly.

In other related factory sector news, results from the factory survey of the Federal Reserve Bank of Philadelphia underscore continued weakness in activity in the region’s factories. Indexes tracking general business conditions (-15.6 vs. -24.9 in April), new orders (-3.7 vs. -18.8 in April), and employment (-1.0 vs. -11.0) were negative in May but increased from lower levels in April. The Empire State Manufacturing Survey of the Federal Reserve Bank of New York also points to soft conditions in the region’s factories. The general business conditions index declined to -3.23 in May vs. 0.63 in April. The new orders index dropped to -0.46 from 0.06 in April. The national ISM factory survey of factories for May will be published on June 2.

Home Builders Continue to Face Grim Business Conditions

The Housing Market Index (HMI) of the National Association of Home Builders dropped to 19 in May from 20 in April. The record low of 18 for this index was established in December 2007. The main message is that business conditions for home builders have not improved and additional declines in home prices should not be surprising.

The present sales index declined to 17 in May from 18 in April. The May reading is a new record low and the most important index of the report because indexes measuring sales six months ahead and traffic of prospective buyers are conjectures. Housing starts for the month of May will be published tomorrow. There is an 11.0-month supply of unsold new homes in the market. An 11.6-month supply of unsold new homes seen in April 1986 is the record high mark.

• Download Full Daily Global Commentary

Published on  Thu, May 15 2008, 21:22 GMT