Industrial production continues to put on a spectacular show in a negative sense. The index of industrial production is down yet again, this time by 0.4 percent vs. a Bloomberg Econoday consensus estimate of -0.1 percent. A steep drop in autos led the way.
Highlights
A steep drop in vehicle production pulled industrial production lower in May, down 0.4 percent. Vehicle production had been leading this report but fell 4.2 percent in the month excluding which the headline loss would have been 2 tenths less severe at 0.2 percent. Utility output is always volatile and fell 1.0 percent, which isn’t helpful, but mining for once is, up 0.2 percent for the first gain since August last year.
The manufacturing component, hit especially by vehicles, is the big disappointment, down 0.4 percent in the month. Declines sweep sub-components including consumer goods, business equipment and construction supplies. Year-on-year, manufacturing volumes are unchanged in what is reminder of how soft the factory is.
There are also downward revisions to April including manufacturing where the gain is 1 tenth more modest at 0.2 percent. The weakness of the factory sector, and its exposure to foreign markets and declining business investment, is contrasting very sharply right now with strength in the consumer sector.
Note that the traditional non-NAICS numbers for industrial production may differ marginally from the NAICS basis figures.
Recent History
Unusually big swings in utility output have been making for uneven readings in industrial production which is expected to slip 0.1 percent in May after jumping 0.7 percent in April. Mining has been a consistent negative while manufacturing has been a negative more times than not. Only a 0.1 percent increase in manufacturing production is expected for the May report, a result that would once again weigh on the factory outlook. The overall capacity utilization rate is expected to inch 2 tenths lower to 75.2 percent, a reading not consistent with price traction for goods.
Industrial Production Since May 2013
Industrial Production Trends
Just Manufacturing?
Bloomberg comments “The industrial sector accounts for less than 20 percent of GDP. Yet, it creates much of the cyclical variability in the economy.”
The implied thinking is “Don’t worry, it’s just manufacturing.”
Some of us dispute that often repeated claim. The reason is GDP only counts final sales to the consumer. It ignores all the business-to-business sales that go into final sales.
I have commented on that at least twice.
- January 25, 2016: Debunking the Myth “Consumer Spending is 67% of GDP”
- February 8, 2016: Rosenberg “Odds of US Recession in Next Year as Close to Zero as Anything Could be Close to Zero”
I am amused by that second link. This is what David Rosenberg, chief economist at money-management firm Gluskin Sheff & Associates had to say “I put the odds of a U.S. recession in the next year as close to zero as anything could be close to zero.”
He made that statement based on the allegedly small percentage that manufacturing plays on the economy.
Gross Output Model
Mark Skousen’s article, Linking Austrian and Keynesian Economics: A Variation on a Theme explains why a Gross Output model that takes into consideration business-to-business transactions works better than the widely used GDP model that doesn’t.
The consumer spending model ignores valued added in business-to-business transactions in every stage of production. The GDP and GO models differ widely in percentages assigned to the consumer and manufacturing in the economy.
For more from Skousen, please see his excellent report Third Quarter Gross Output and B2B Index Reports Sharp Slowdown in US Economy.
On January 21 Skousen reported Latest GO Data Says Recession May be Around the Corner.
Service Economy
By the way, the services economy is not acting all that hot either: Non-Manufacturing ISM Much Weaker Than Expected
Mike “Mish” Shedlock
Didn’t the Empire State Manufacturing Survey also come out today?
Hard to imagine anyone is brave enough to manufacture something in the state of New York.
Manufacturing a physical product is hard enough without some fat focker sitting on top of you. Don’t believe me? Try it!
I just don’t see how with all the negative numbers for production and poor numbers for job creation, that we are looking at a GDP Now forecast for over 2% GDP growth for Q2.
The forecasts make less sense every day!
All the underlying real economic numbers I look at slap recession in your face – just one problem. The government has NEVER claimed a recession in the past 50 years with a DEMOCRAT in office. And most government bureaucrats ARE Democrats.
Interesting.
GDP is also deceptive. Retail sale, especially to the individual is the most significant metric both because it shows what the most significant aspect of the economy, i.e. human beings are able to spend, and because retail sale is the terminal end of the entire economic process. This is why implementing a macro-economic general discount at retail sale would be so powerful and would integrate the goal of Austrian economics (deflation) into the entire economy. Costs are summed at retail sale for any product or service. Hence a discount there that was rebated back to the retail merchant enables that merchant to discover and set his best competitive price (a retail discount is NOT price controls because the merchant sets his price himself BEFORE the [rebated] discount) and then the discount shifts the vector of the entire economy toward price deflation.
A retail discount actually utilizes one of the truest and most general processes of the physical universe namely what is referred to in various Wisdom traditions as the cycle of action, namely Start, Change and Stop. Every process has this precise and simple but powerful character. Economists, not generally being very wise, have missed it….and thus their theories fail to decipher importances and fail.
“retail sale is the terminal end of the entire economic process”
The end of the process is profit, followed by investment in wealth creation.
Retail customers are useful idiots.
Of course the end of the process can also be loss……..
@Jack
Cute reply, but not a relevant systemic insight. Retail sale is where production becomes consumption and is a full STOP for any and all goods and services. The salient things to take from this fact are that all costs are summed at that point and that no economic agent can be harmed or manipulated at and afterward of that point. As Austrians are all the time pi$$ing and moaning about manipulation of their God the market, the above should allay their dogmatic fears. Of course it takes a long time sometimes to see the truth when one has a long standing (and false) opinion about what is economically doable.
The world is changing. Industrial production is not what is used to be. For example, I now generally buy off lease used certified refurbished or great condition 3rd generation intel laptop pcs for a couple of hundred dollars. These cost $1200+ when new. Dell and HP have the best selections at this time. Performance and feature wise, they are equal to ones today that cost $650 to $1000 new. You just need to know how to shop and how to read specs so you get good merchandise. In transit now I have a Dell E6530 with intel i5 3380m ‘a’ stock for $269. I could have got a E6540 with the same processor and 8GB from E bay in top shape for $189, but I wanted a 13 inch screen from a reputable dealer. It, or another one in the house, will end up as a media server / home server. Cheap and easy.
Rail is Frail
WASHINGTON, D.C. – Jun. 15, 2016 – The Association of American Railroads (AAR) today reported U.S. rail traffic for the week ending Jun. 11, 2016.
For this week, total U.S. weekly rail traffic was 513,471 carloads and intermodal units, down 7.5 percent compared with the same week last year.
Total carloads for the week ending Jun. 11 were 248,039 carloads, down 8.7 percent compared with the same week in 2015, while U.S. weekly intermodal volume was 265,432 containers and trailers, down 6.3 percent compared to 2015.
…
For the first 23 weeks of 2016, U.S. railroads reported cumulative volume of 5,522,488 carloads, down 13.5 percent from the same point last year; and 5,914,283 intermodal units, down 2.3 percent from last year. Total combined U.S. traffic for the first 23 weeks of 2016 was 11,436,771 carloads and intermodal units, a decrease of 8 percent compared to last year.
https://www.aar.org/newsandevents/Press-Releases/Pages/2016-06-15-railtraffic.aspx
It was a Chinese new year
It rained
Trump is leading in polls
Hillary is unfairly being attacked
Everyone retired
We are resting
There is always a good reason WHY
How can anyone expect industrial production to increase when jobs are being shipped overseas because of corporate greed?
Robots
The American worker KNOWS they are screwed when even the Chinese must buy robots to compete. Our wage base is officially below the Chinese now.
I don’t see how it’s mathematically possible to have persistent drops in production without a recession. Don’t the things people buy have to be manufactured prior to their purchase?