Auto Recovery Extended, Industrial Production Up
Industrial Production
1. The numbers.
Total industrial production (IP) advanced 0.2% for September (y/y = 3.2%). August production was revised 0.2 percentage points lower, but July was revised the same amount higher (a wash). Manufacturing output grew 0.4% in September (y/y = +3.9%) following a 0.3% August rise. Total production for Q3 grew 5.1% (annualized), and for manufacturing, +4.3%--a good quarter!
2. Additional quantities.
Mining output (14% of total IP) expanded a hefty 0.8%, the same as August. Utilities (11% of total IP), however, had another weak month; output fell 1.8% in September after a 2.9% August decline. Total capacity utilization inched up one-tenth of a percent, to 77.4%. Factory operating rates improved 0.2 percentage points, to 75.1%. By the way, these are NOT utilization rates typically associated with major price pressures.
3. Majority rules?
Output in September grew in 11 of 19 industrial sectors.
4. Continuing on a roll.
The production of business equipment moved another 1.0% ahead. This has been a “saving grace” for the U.S. economy. But is it to some extent a substitute for the creation of new jobs, as well?
5. Drill, baby, drill!
Oil and gas well drilling increased another 0.8% in September; y/y = 21.2%-- the largest growth seen in any major area of production. Just think if we really turned this sector loose!
6. Auto recovery extended.
Motor vehicle/parts output in September expanded 0.7%; y/y = 6.7%.
7. Follow-through?
As mentioned, Q3 WAS a good quarter for the industrial sector of the economy. But producers must be nervously looking around and observing inconsistent job increases, possible sovereign defaults of some European nations, and a dysfunctional U.S. government. Producers are likely to behave very cautiously in upcoming months, and that lack of commitment to “growth” is likely to produce tepid output increases, and in general, an unsatisfying economic climate.
Producer Price Index
1. The numbers.
Wholesale prices ran hot, across the board, in September. The Finished Goods PPI soared 0.8% higher (y/y = 6.9%). Ex- food and energy items, the increase was +0.2% (y/y = 2.5%). More detail:
Intermediate Goods total = +0.6% (y/y = +10.5%); core = +0.2% (y/y = +7.5%);
Crude Goods total = +2.8% (y/y = +20.9%); core = +1.0% (y/y = +20.7%).
2. QE2 hangover.
Some of the Fed-driven huge build-up of liquidity over the past year is still reverberating around the system. That these increases would occur in this squishy world economic environment ought to give us all some pause—especially at the FOMC. Banish the thought of any QE3! Also, the output-gap model of inflation is deficient.
3. Hey buddy, can you spare a dime?
These raw material prices are too big to eat. There will be a strong temptation to pass them along to keep up operating margins.
4. Not to be overlooked.
One thing that the sizable increases in raw material prices indicates, together with persistent price pressures all the way up the supply chain: demands. These increases are achieved because there is enough demands out there to justify them and pay them.
5. Diet needed?
Consumer food prices grew another 0.6% in September (y/y = +8.0%). These price increases—far in excess of wage increases--are putting a real squeeze on household budgets. Separately, crude energy prices jumped 7.7% in September, and finished energy prices expanded 2.3%. So there you have it: a rock and a hard place. Even Fido is under attack: pet food prices leapt 0.9% higher in September, making the y/y = 5.5%. [Fido wants inflation to roll over and play dead.]
6. Technology/productivity payoff?
Capital equipment prices were among the most well-behaved of any group of goods. September = +0.2%, y/y = +1.7%.
7. Sign of a home construction turn?
No! Softwood lumber = -1.2% in September; hardwood lumber = -0.6%; plywood = -1.9%; gypsum products = -1.7%.
8. In summary.
We need to be asking ourselves “where is all this price pressure coming from.” Maybe some raw material producers are benefiting from them, but otherwise, the rest of the economy is not. Purchasing power is going out the window. PIMCO calls this a form of slow-burn default.
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ClearView Economics, LLC was established in March 2000. Its President, Dr. Ken Mayland, a person who has spent more than 35 years studying the business cycle, is a business economist.
The firm's purpose: to provide the best input the economics profession has to offer - in the form of research and forecasts - decision makers.
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