Output Growth: Modest Growth Slows Further
Today’s industrial production report followed, and is consistent with, the pattern of the ISM index in contraction territory for three straight months and a number of regional PMIs also signaling a drop in output.
Over the past three months, industrial production has declined 2.0 percent and the year-over-year gain has slowed further to 2.8 percent (top graph), which is consistent with the overall trend of slower industrial production we have seen in recent months. Our expectation is that industrial production will grow 2.8 percent during the second half of this year compared to 4.2 percent during the first half. The economy has indeed moved into a pattern of subpar growth that increasingly looks like the normal pattern for the overall economy. With other major drivers of growth similarly struggling, the tepid pace of industrial production growth is enough to keep the economy from slipping back into recession, but not nearly strong enough to spur on job growth and business spending-led economic expansion.
Tech, Non-Tech: A Study in Volatility
As illustrated in the middle graph, the volatility in high-tech production provides a significant amount of volatility to industrial production compared to non-tech production. Over the past three months selected high-tech production is down 1.8 percent while ex.-high-tech production is up 3.0 percent. Computer & peripheral equipment production is down 10.6 percent over the past three months, which is consistent with the weakness seen in capital goods orders.
For other sectors, business equipment production is up 10.9 percent over the past three months. Fabricated metals were up while chemicals and paper were down over the same period.
Capacity Utilization: Impacted by Isaac, but Also Weaker Overall
Capacity utilization declined to 78.2 percent, as utilization in manufacturing, mining and utilities all declined. Hurricane Isaac likely played a role here but the decline also reflects some weakness in computer output, which has been evident for several months.
By stage of production, utilization continued to decline in a pattern which peaked several months ago (bottom graph). Therefore, while Isaac may have overstated the drop, the reality is that utilization is declining in line with slower over production in the economy. This is likely to take some pricing pressure off firms and thereby provide some stability to the overall pace of inflation in the economy.
Lower capacity utilization and overall final demand in the second half of this year is consistent with our expectation for slower profit growth as well as slower gains into next year.