Wednesday, August 15, 2012

July Industrial Production Highlights; Factory Output Is Growing at 2X Rate of Overall Economy


The Federal Reserve released its report this morning on Industrial Production in July, here are some highlights:

1. Overall industrial output increased by 0.6% in July on a monthly basis, and by 4.4% on an annual basis, marking the 30th consecutive month of annual growth.

2. Annual increases were especially strong in July for business equipment (12.3%), motor vehicles and parts (26.5%) and overall manufacturing (5.0%), especially for durable manufactured goods (9.5%). 

3. The Federal Reserve reported motor vehicle assemblies of 11.01 million units in July (seasonally adjusted, annual rate), which was an increase of 29% over last year and the highest number of monthly assemblies in more than five years, going all the way back to June 2007 (see top chart above). Look for strong gains in vehicle sales to continue through the summer and fall, especially since banks are showing a new willingness to make car loans, see Monday's WSJ article "A Green Light for Car Loans" about the recent car-financing surge. 

4.  July's index for business equipment was just slightly below June's level, but was up by 12.3% compared to a year ago, and the index level for that market group of 104.5, is now slightly above the previous pre-recession peak in February 2008 of 104.4 (see chart above).  The transit component of the business equipment group registered the strongest annual gain in July at 28.1%.

MP: Overall, today's Fed report suggests that America's industrial sector continues to grow and remains at the forefront of the economic expansion - the June 2011-June 2012 growth rates in industrial production of 4.7% and 5.6% for factory output are more than twice the rate of growth in the overall economy of 2.2% for real GDP during the same period. Nothing in today's report on industrial output in July would suggest that the U.S. economy is on the front edge of a recession, especially with the strong performance for the production of auto assemblies (now at a five-year high) and business equipment (reached an all-time high in June), and the strong gains for durable goods manufacturing of 9.5%.

Update: From Scott Grannis, "The July industrial production numbers all but rule out the recession that many have been looking for. The economy went through a bit of a soft patch in the first half of this year, but now looks to be picking up. The folks at ECRI have a lot more 'splainin to do."

22 Comments:

At 8/15/2012 9:30 AM, Blogger Jon Murphy said...

In the same vein as automobiles:

Truecar.com is reporting transaction prices are up 1.6% year-over-year. Furthermore, dealership incentives are down. This is a sign of good consumer demand for vehicles, especially option-laden vehicles.

 
At 8/15/2012 9:34 AM, Blogger morganovich said...

jon-

do you know of a non seasonally adjusted series for this data? i could not seem to find one from the fed, and given how fishy many of the SA figures seem to have been of late, i'm curious about just how much of this is signal vs adjustment and how the adjustment applied compares to previous seasonal patterns in the raw data.

 
At 8/15/2012 9:40 AM, Blogger Jon Murphy said...

NSA for which series?

Industrial Production is only released in SA form.

Assemblies one can get from Wards Auto, but you need to pay for it.

I don't know about the business equipment index.

If you want a specific industry production index, you can get that in NSA form, but as far as an overall manufacturing index, INDPRO is all we have.

 
At 8/15/2012 9:40 AM, Blogger morganovich said...

"Overall, today's report from the Federal Reserve demonstrates that America's industrial sector continues to grow and remains at the forefront of the economic expansion"

a question:

this indpro reading was at 98% of the 2007 average. reported gdp is significantly higher than 2007.

so how is is possible for a sector that has not yet reached its pre recession highs to be at the forefront of an economic expansion when gdp has long since exceeded pre recession highs?

put another way, if industrial production is still in recovery and the economy as a whole is in expansion, how can one describe industrial production as being at the forefront? it is lagging the overall economy coming out of the recession, not leading.

 
At 8/15/2012 9:46 AM, Blogger morganovich said...

jon-

yeah, that's what it looked like. you seem to generally have a number of good other proxies. i was just wondering if you had some other ideas on how to gauge this.

this did not look too good:

"From the NY Fed: Empire State Manufacturing Survey

The general business conditions index slipped below zero for the first time since October 2011, falling thirteen points to -5.9. At -5.5, the new orders index was below zero for a second consecutive month, and the shipments index fell six points to 4.1."

it seems to be following the weak readings from philly fed over the last couple months into negative territory.

in conjunction with PMI being negative for 2 months (driven by poor levels of orders) this indpro number looks a bit dissonant with the other data.



 
At 8/15/2012 9:48 AM, Blogger Jon Murphy said...

so how is is possible for a sector that has not yet reached its pre recession highs to be at the forefront of an economic expansion when gdp has long since exceeded pre recession highs?

The reader's digest version of it is this: rate of growth. Not only is INDPRO growing at a faster rate than the overall economy, but manufacturing is also adding the most jobs.

Also, in economic terms, when something is at the "forefront" of a recovery, it doesn't necessarily mean it has completely recovered. Economics is largely concerned growth rates. Basically, manufacturing is a leading indicator to the rest of the economy. As long at the growth rate remains above 0, the economy will likely keep growing (standard warning about using only one indicator).

Really, in economics, the absolute level doesn't matter as much. It's more about the growth rate to get an idea of what to expect.

(With some leading indicators, like the PMI or USLI, the ROC doesn't matter as much as the overall index direction, but that's a different story).

 
At 8/15/2012 9:53 AM, Blogger Jon Murphy said...

Regarding the Fed Empire State Manufacturing Survey and the Philiy Fed one:

They are different measurements. Whereas INDPRO measures actual output, the surveys measure conditions. They are leading indicators. A drop below 0 doesn't necessarily indicate a recession (it could, but not always). Rather, a drop below 0 indicates slower growth. Likely, the numbers the Philly Fed and Empire State surveys are showing us will prelude to slower growth in the coming quarters. Whether this will lead to a recession or not, and when the timing will be, is another matter.

 
At 8/15/2012 10:12 AM, Blogger Jon Murphy said...

Just to go back to the growth rate thing:

It is similar to Housing. Housing Starts are a shadow of what they once were. However, economically speaking, it has lead the recovery. Housing's rate of growth emerged from a recessionary trend before the economy's did. It will fall into the next recession before the economy does.

 
At 8/15/2012 10:30 AM, Blogger marmico said...

how the adjustment applied compares to previous seasonal patterns in the raw data

See here.

 
At 8/15/2012 10:42 AM, Blogger morganovich said...

"Not only is INDPRO growing at a faster rate than the overall economy, but manufacturing is also adding the most jobs."

i think that's a very misleading way to frame it.

perhaps now, but not overall.

and % change is a bad measure of leadership.

let's imagine 2 stocks, each priced at 100.

one drops to 90, one drops to 50.

then the former rises 10 points and the latter 9.

that's +11.1% appreciation for the first, and 18% for the latter. but would you really describe the second stock as being at "the forefront of the equity recovery"?

maybe this is just semantic, but i would not view that as an accurate description.

if you are at the forefront of a movement, you are at the front. if you are at the forefront of a race that has finished (as we can view a recovery getting back to pre recession levels and entering expansion) then it is impossible that you have not crossed the finish line yet.

this just seems like very misleading phrasing to me.

industrial production has been a laggard, not a leader in this recover.

it dropped far more than the rest of the economy, so it can show better % figures, but in terms of completing recovery and entering expansion, it is a significant laggard, not a leader.

"
Really, in economics, the absolute level doesn't matter as much. It's more about the growth rate to get an idea of what to expect"

and, with respect, i disagree with this quite strongly. absolute level matters enormously.

would you rather have $50k per capita gdp growing at 1% or $20k growing at 2%?

absolute values matter more than %'s. you need to now things like "off of what base" and the nominal contribution provided by a % change.

i find your housing starts example to be just like the indpro example. again, maybe it's semantic, but claiming that something that has lagged wickedly in a recovery is leading seems to occlude more than it reveals.

perhaps a better way to look at it would be to take the overall growth and divide it by sector to see which is providing the most benefit. THAT would seem to be the leader.

otherwise, you could always find some tiny niche and call it "leading" because it fell apart and bounced back.

 
At 8/15/2012 10:54 AM, Blogger morganovich said...

marmico-

thanks.

is there data for indpro as a whole?

 
At 8/15/2012 11:03 AM, Blogger morganovich said...

jon-

i understand the difference with the fed surveys, but for them to diverge so meaningfully from indpro (and have pmi agree) makes it seem like there is something a bit fishy with the indpro number.

and when pmi is in contraction yet ism non manufacturing is expanding (and when ism non man is showing much higher production values than pmi) it still seems very questionable to describe manufacturing as "at the forefront"

http://www.ism.ws/ismreport/nonmfgrob.cfm

compare manufacturing to services here.

by what metric does manufacturing appear to be "at the forefront"?

i suppose you could argue employment, but in the july period, manufacturing employment saw a very sharp drop in growth.

all the output figures (production, new orders, deliveries) show manufacturing lagging, not leading.

 
At 8/15/2012 11:07 AM, Blogger Jon Murphy said...

Morganovich-

I think this may be a conversation best continued via email. I think we are using different definitions.

But let me flip your example around on you (and you can then tell me if I understood your comment or not):

Back to having two stocks. After all said and done, the first stock is worth 100 and the second one is worth 59, yes?

So, they have growth rates of 11.1% and 18%.

But now this: the growth rate on the first stock starts to diminish and eventually goes negative. The growth rate on the second stock still rises. Which would you say is better performing?


As far as GDP returning to pre-recession levels and INDPRO behind, well some of that is due to the components of GDP. Likely, without the massive government spending over the past few years, GDP wouldn't be quite as high as it is now. It might be, but I am not as sure. But we are all well aware of GDPs flaws, so let's not spend a lot of time on this argument.

One final part, though, is INDPRO represents about 25% of the overall economy. The fact that production has not returned to pre-recession levels could be influenced by a number of things that would not necessarily be reflected in GDP. For example, if consumers opt to purchase more imported goods, then INDPRO might not rise as much.

But, in my opinion, INDPRO, does do a better job representing the overall economic health of the economy than GDP. That is why, although according to GDP we have reached pre-recession levels, I have no jumped aboard that train. INDPRO has not fully recovered from the recession, so I say it is expanding (because it is year-over-year), but not growing since we have not surpassed the previous peak.

But I digress.


The main point here is growth rates: economists are concerned with the direction things are heading. Are they growing faster? Slower? Not at all? What does this mean for other sectors of the economy? That sort of thing. One could look at INDPRO and say "well, it's still below the peak." Ok. Well, what's going to happen? That's where growth rates come in. Using growth rate analysis, one can say "INDPRO is below the pre-recession peak, but will grow in the near term and likely surpass the peak this year*."

To bring this to housing: the housing rate of growth leads the US economy. Even though housing is very low, we can say (based on the historical relationship) that since housing's growth rate is rising, the economy will likely continue to rise (the economy has never been in a recession while housing was rising year-over-year).

Once we figure out the growth rates, then we can discuss what it means for absolute levels. Then we can say "ok, housing is rising, so that is good, but it is coming off a deep low so it won't have much of an impact on the economy." We can say "boy, manufacturing sure is doing well." We can say "consumer spending is up, so the consumer is healthy**." Those kind of things


*This is not a prediction on my part. Just an example.

**Again, examples.

 
At 8/15/2012 11:08 AM, Blogger Jon Murphy said...

i understand the difference with the fed surveys, but for them to diverge so meaningfully from indpro (and have pmi agree) makes it seem like there is something a bit fishy with the indpro number.

Wait a tick, I'm confused. Is your problem that the INDPRO number is rising or that it is being considered the "forefront?"

 
At 8/15/2012 11:19 AM, Blogger Buddy R Pacifico said...

Scott Grannis states:

" The folks at ECRI have a lot more 'splainin to do'."

Here is another blogpost that rips ECRI for its imminent recession call in Sept, 2011.

The "Plowhorse Economy" must be confounding and this must be a very non U.S. type recovery.

 
At 8/15/2012 12:16 PM, Blogger morganovich said...

"But now this: the growth rate on the first stock starts to diminish and eventually goes negative. The growth rate on the second stock still rises. Which would you say is better performing?"

you seem to have switched definitions a bit here in the middle.

let's say that each does the same as they did again.

1 goes to 110, the second to 68. again, the latter grows more in % terms, but the former contributes more to the recovery of my portfolio.

going out further into your example, if one later went negative, clearly it would no longer be contributing to growth.

but to what real world exemplar can you point that makes it appear that manufacturing seems to be growing more than services?

clearly, the ism data does not show this.

the fed surveys do not show this.

the only data that seems to point that was is the seasonally adjusted indpro, and given that we do not seem even be able to get a sense of how it is being adjusted (and having seen recently how badly SA distorted the jobs numbers) of all series, that is the one of which i am most suspicious.

regarding the G component in gdp, keep in mind that some of that flows into indpro too. they are not really independent variables. this makes such comparisons a bit fraught.

"For example, if consumers opt to purchase more imported goods, then INDPRO might not rise as much."

which would seem to be a reason that indpro might lag. i'm not sure i follow you here. how does import substitution make indpro not a laggard?

"so I say it is expanding (because it is year-over-year), but not growing since we have not surpassed the previous peak."

i think it might benefit us to standardize our terms here a bit to avoid confusion.

i was always taught that the period of growth after a recession was called "recovery" until it reached pre recession levels and then was called "expansion". would it be acceptable to standardize on those terms to avoid confusion?

"economists are concerned with the direction things are heading. Are they growing faster? Slower? Not at all? What does this mean for other sectors of the economy"

as a fellow economist, at least by training, i again must respectfully disagree.

that is one thing in which they are interested, but nominal size matters too.

if 0.1% of the economy grows 10%, that might be a huge deal in % terms, but is pretty tiny in overall impact.

housing growth rate may "lead" but the contribution of housing to the overall economy's growth and it's contribution to the recovery/expansion has not led, it has lagged.

it seems to me that calling it a "leader" is sort of tail wagging the dog thinking.

 
At 8/15/2012 2:11 PM, Blogger bart said...

morganovich said...
jon-

do you know of a non seasonally adjusted series for this data? i could not seem to find one from the fed, and given how fishy many of the SA figures seem to have been of late, i'm curious about just how much of this is signal vs adjustment and how the adjustment applied compares to previous seasonal patterns in the raw data.


Industrial Production: Diffusion Indexes: Three months earlier NSA

http://research.stlouisfed.org/fred2/series/DIFFTHREE

No real change since late 2009


--------

PMI manufacturing last 7 months YoY has been negative:
-11.0%
-14.7%
-12.7%
-9.3%
-0.1%
-10.1%
-2.2%

--------


Last 10 months of ISM NMI/Services production has averaged -3.6%




Concentrating on manufacturing while ignoring services isn't wise in my opinion.


Something smells...

 
At 8/15/2012 2:12 PM, Blogger bart said...

Subprime Car Loans Return to Favor Among Auto Lenders


Anyone remember housing and sub prime?

 
At 8/15/2012 2:18 PM, Blogger bart said...

Productivity INDPRO


"Output: Business sector output is a chain-type, current-weighted index
constructed after excluding from gross domestic product (GDP) the
following outputs: general government, nonprofit institutions, and private
households (including owner-occupied housing). Corresponding exclusions
also are made in labor inputs. Business output accounted for about 75
percent of the value of GDP in 2011. Nonfarm business, which excludes
farming, accounted for about 74 percent of GDP in 2011.
Annual indexes for manufacturing and its durable and nondurable goods
components are constructed by deflating current-dollar industry value of
production data from the U.S. Bureau of the Census with deflators from the
BLS"

http://www.bls.gov/news.release/prod2.tn.htm





INDPRO uses the deflator, which has "issues" when even just compared to the CPI, let alobe when comprared to the more inclusive and accurate CPPI.

INDPRO adjusted by CPI loses about 1.5% in YoY change rate.

INDPRO adjusted by CPPI loses about 3-4% in YoY change rate, making it barely positive, and very possibly negative considering "normal" error issues.

 
At 8/15/2012 2:22 PM, Blogger Jon Murphy said...

By the way, Bart, Morganovich and I picked up this conversation via email. I'll include you in the chain when I get time to respond to him

 
At 8/15/2012 3:42 PM, Blogger arbitrage789 said...

We're still going to lose money on GM

 
At 8/17/2012 8:12 AM, Blogger VangelV said...

put another way, if industrial production is still in recovery and the economy as a whole is in expansion, how can one describe industrial production as being at the forefront? it is lagging the overall economy coming out of the recession, not leading.

You know the answer. The data is so screwed up and manipulated that we are looking at a lot of noise and trying to find a very tiny signal. This is a fool's game, particularly in an election year.

 

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