Following the rebound in consumer spending (heavily weighted to subprime auto sales), economists expected a rebound in Industrial Production.
Instead, last month was revised lower, and this month was not only negative but also lower than any economist’s estimate in the Bloomberg Econoday Consensus Range.
The hawks may have some good arguments at this week’s FOMC meeting but they won’t have anything convincing to say on the manufacturing sector which, instead of rebounding from a weak first quarter, appears to be slowing further. All the main numbers in today’s industrial production report are below low-end forecasts with the headline at minus 0.2 in May and April revised 2 tenths lower to minus 0.5. May is the fourth negative reading in the last six months with the other readings at no change. Capacity utilization fell 2 tenths to 78.1 percent which is the lowest rate since January 2014.
The manufacturing component fell 0.2 percent in May for the third negative reading in five months. Weakness in May was concentrated in consumer goods and construction supplies, the latter a disappointing indication for the housing sector. The mining component, at minus 0.3 percent, has really been hit hard by weakness in the energy sector but, in a plus, contraction here seems to be easing. The utilities component is positive but just barely at plus 0.2 percent.
Turning back to manufacturing, vehicles are actually a very big positive with a third outsized gain in a row, at plus 1.7 percent in May vs 2.0 percent and 4.0 percent in the two prior months. This reflects very strong consumer demand for cars and trucks underscoring unit vehicle sales which, in previously released data, are the strongest in 10 years. Excluding vehicles, however, the decline in May manufacturing slips another tenth to minus 0.3 percent. Another area of strength is capital goods which is showing life in the durable goods report and which here, tracked in the business equipment subcomponent, shows a 0.2 percent gain for May.
Otherwise, however, this report is surprisingly weak and echoes this morning’s equally surprisingly weak Empire State report for June. Though there are no separate readings on exports in either of this morning’s reports, weakness here appears to be pulling down the manufacturing sector.
The Fed’s Industrial Production and Capacity Utilization report shows there has not been a positive report all year, but December 2014, February and March 2015 were revised from negative numbers to zero. January and April were revised lower from previously reported negative numbers.
click on chart for sharper image
Among the major market groups, only business equipment and business supplies registered production gains in May, with increases of 0.2 percent and 0.1 percent, respectively. The production of consumer goods decreased 0.3 percent, as declines for both consumer energy
products and non-energy nondurables outweighed a gain for durable consumer goods.
Manufacturing output fell 0.2 percent in May, as a decrease of 0.7 percent in the output of nondurables was partially offset by a small increase in the production of durables. The largest gain among durable goods industries was recorded by motor vehicles and parts; its index increased 1.7 percent. Results for other durable goods industries were mixed, with none posting a gain or loss exceeding 0.7 percent. Almost all major nondurable goods industries registered declines, with the largest drop, 1.6 percent, occurring in the petroleum and coal products industry.
How Long Can Auto Sales Hold Up?
The bright spot once again is autos. It was a big factor in in my June 11 report Retail Sales Bounce as Expected; How Much Longer Can Subprime Auto Sales Lead?
I still maintain auto sales are going to collapse at some point, likely out of the blue, and it will surprise the economists when it does happen. I don’t know when, but suggest some time this year. Next month would not surprise me in the least.
Car sales are registered when dealers take delivery. At the turn, dealers who have been loading up are going to take some pretty steep losses on inventory they will have a hard time unloading.
Mike “Mish” Shedlock