Economists were surprised again today, this time over industrial production.
The Econoday Consensus Estimate was for a flat reading of 0.0 percent but production fell 0.3 percent.
Moreover, the Fed revised December production lower, to +0.6 percent from +0.8 percent. Effectively, the consensus was off by 0.5 percent.
Blame the Weather
A swing in utility output skewed what is, however, no better than a modest industrial production report for January. Industrial production, reflecting a 5.7 percent weather-related drop for utilities, fell 0.3 percent which is below Econoday’s no-change consensus.
But the real disappointment in the report is the manufacturing component which could muster no better than a consensus gain of 0.2 percent. This reading hasn’t been able to build any momentum to speak of and was held down in January by a sharp 2.9 percent monthly downswing in vehicles. Excluding motor vehicles, manufacturing volumes rose 0.5 percent which is really the highlight of today’s report. Also a highlight though is mining which is the report’s third and smallest component. Mining continues to show new life with a very sharp 2.8 percent jump in January.
Overall capacity utilization reflects the general softness of the industrial sector, at 75.3 percent for a 3 tenths decline in the month and 4.6 percentage points below its long run average. Manufacturing utilization is likewise soft at 75.1 percent.
The industrial economy, held down by weak global demand, has been running below average the past 2-1/2 years, when energy prices first collapsed in mid-2014. But advance indicators, including this morning’s Empire State report, are almost uniformly pointing to a rebound ahead, a rebound however that has yet to appear in the government’s definitive data.
Easy to Predict
This was too easy to predict. On January 18, 2017 I noted Industrial Production Jumps Due to Weather: Good News Stops There.
Due to the jump in December industrial production, The FRBNY upped its first quarter GDP Nowcast estimate up from 2.1% to 2.7% on January 20.
On January 24, in Formulas Don’t Think: Investigating Weather-Related GDP, I commented: “Temperatures have been warmer than normal for most of January. Temperatures in Chicago hit a remarkable 60 degrees last Saturday.”
Here are the weather-related charts I posted.
January Chicago Temperatures – Actual Highs vs. Average Highs
December Chicago Temperatures – Actual Highs vs. Average Highs
Temperatures from Accuweather.
I calculate a net of -67 degrees for the month of December. That’s an average of only -2.16 degrees per day.
I calculate a net value of +132 [for the month of January]. That’s an above average performance of +4.26 degrees per day. It would have been much greater except for a nasty five-day stretch from January 4th through January 8th.
The problem with unthinking formulas is they extrapolate going forward. December capacity utilization affected projections for the entire quarter going forward.
If we attribute at least some of the capacity utilization increase in December to unseasonably cold weather, then that portion and more will be taken back in January.
Other data can impact the results as well, but all things being equal, the New York Fed capacity utilization projection for 1st quarter GDP will be unwound.
Here we are. Economists were surprised again.
GDPNow Forecast Dives
Check today’s update to the GDPNow Forecast.
Latest forecast: 2.2 percent — February 15, 2017
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 2.2 percent on February 15, down from 2.7 percent on February 9. The forecast for first-quarter real consumer spending growth declined from 3.1 percent to 2.8 percent after the retail sales report from the U.S. Census Bureau and the Consumer Price Index report from the U.S. Bureau of Labor Statistics were released this morning. The forecast for the contribution of inventory investment to growth fell from -0.20 percentage points to -0.39 percentage points after the industrial production report from the Federal Reserve Board of Governors and the Business Inventories report from the U.S. Census Bureau were released this morning.
Seasonal Adjustment Silliness
The models took unusually cold December weather for a genuine spike in industrial activity. The models then projected that spike forward for the entire first quarter!
The New York Fed Nowcast comes out on Friday. Don’t be surprised by a serious dive.
By the way, please note this Econoday comment on industrial production: “This reading hasn’t been able to build any momentum to speak of and was held down in January by a sharp 2.9 percent monthly downswing in vehicles.”
Auto inventories are building, the manufacturers cut production, yet according to CPI data today, auto prices rose a whopping 0.9 percent in January.
This was one of the screwiest CPI reports that I can recall. For discussion, please see CPI Jumps Most Since February 2013 on Energy: Did Gasoline Prices Really Rise 7.8% in January?
Mike “Mish” Shedlock
I’m confused why you continue to post these GDP numbers. It’s almost like posting the presidential poll numbers. Meaningless. Fake. Worthless. It’s becoming a waste of my time to even read them. Now they’re trying to correlate it to the weather? lol.
For the record – I won’t be reading any more GDP number blogs at this website. I can’t tolerate the whiplash any longer.
What is wrong with you, Old timer ? Why do you make such ungrateful comments ? There is more to life than just sitting in your armchair and shaking your fist at the world.
When there’s no rhyme nor reason to these silly GDP forecasts it becomes an exercise in futility.
You’re guess is as good as mine.
It’s more productive to fiddle around with a Rubic’s Cube.
I tend to skip over GDP articles unless anything stands out and go to comments which is more fun to read 😉 . I expect there are quite a few that keep an eye on Mish’s analysis to ground them a bit though…without that sort of criticism you are left with whatever is being promoted elsewhere.
There are new readers all the time
Some want me to spell out every acronym others know what they mean.
In attempting to strike a balance, I sometimes get it from both sides.
I have argued GDP measurements are silly.
Why do I comment on them?
Because most, especially mainstream media, do not feel that way.
At the least, GDP reports give a starting point for input on what people think is really going on, your own commentary generally pulls the reports into a level view and brushes of the msm hype, I guess people easily jump to the conclusion you are validating or accrediting the series in some way beyond what it is.
Taking the opportunity to post a link to the disturbances in France. These are low level but continuous now for over a week, scattered between different localities ( e.g. today was Barbes and Argenteuil msm ignores them) . French press mostly posts damaged immigrant shops etc. , alt-media posts police gassing local football matches /beating trainer etc., so it looks like a few people looking for trouble, and this plays into elections. Protests started over violation of a local by police who say accident and are free.
I have actually done well, and better than the consensus forecasts at the near-term. This weather-related stuff is a good example.
So are my continual “take the under” comments on optimistic forecasts.
However, I have done poorly at the intermediate-term calling for recessions.
We keep muddling through.
Betting against optimism or pessimism has worked.
If you are looking for perfection, you will not find it here.
As I have said before, motor vehicle production is in my opinion unsustainable. There aren’t that many drivers.
GM pulling out of Europe, sale to PSA. Losing money for years, reduced this year but missed breakeven and blamed Brexit.
One German politician (2 plants there) postulated it was because GM may now be placing America first as per Trump policy indication – so Trump blamed.
Fact is there is excess capacity. Someone had to blink. May be the case in all developed markets – peak car.
Maximus Minimus said:
Are you saying Opel and Vauxhall will be sold to PSA?
Well, this is big news in Germany. First, they closed the facttory in Bochum. Now, there is talk that PSA (Peugeot-Citroen) would stop making normal cars there. All electric vehicles? German politicians tout those as “zero emission”. Someone should sue the Germaan government and force them to correct this ludicrous label.
Wasting billions to preserve jobs is a german specvialty. Remember coal mining for decades? We are talking about 300,000 € per head and year.
Watch this space – and wait for a rapid consolidation of the car industry. Something has got to give. Despite high visibility. PROTON in Malaysia and Alpha Romeo in Italy next?
Been driving my Toyota Tacoma for ten years. Still going strong. The new generation cannot afford to buy cars because of their student debt.
No cam belts to replace? Saving $ 1,000 at every service interval for cam belts? I had a 1991 truck with toyota’s RE 22 (?) engine. The cylinder head was never off in almost 400,000 miles.
Car makers design cars in a way to make more money for dealerships, JMHO.
…In North America, GM earned a record $12 billion, compared with $11 billion last year, leading to the largest profit-sharing payment to U.S. workers in GM’s history…
Greece pulling out of Euro and adopting dollar standard?
I think a survey of witch doctors would be more likely to mean something than mainstream economists…
Mathew Marty said:
As a purely anecdotal addition to the forecast, I see everyone in the industrial manufacturing area optimistic for 2017. Some have already seen a pick up in orders while others have a pick up in quotes and activity.
I think that investment by small and mid sized companies will be higher this year than prior years. That should help GDP.
Also, rising rates would help eliminate malinvestment and move $ to productive activities.
Just one view from the productive portion of the economy.
Economics seems to be a study of human behavior and evidently attempts to make predictions based upon past performance. While I have little doubt that humans have some pretty predictable responses, I think we have to understand that by attempting to deliberately harvest or modify those responses, they can also alter them in unpredictable ways.
If car prices are rising while inventories grow, either the dealers are not reflecting the shortage of demand in their pricing or they are attempting to maximize return on decreasing sales. I find this same issue in my own small business where I can respond to shrinking sales by becoming more aggressive in pricing resulting in more sales and lesser profit, or I can hold out for higher profit and live with less overall sales. Being frugal, I don’t have to have a certain sales level to survive, So I tend to go for higher prices and lower volumes. Dealers may be flush enough that they simply would rather live with lower volumes and enjoy the margins. The bigger question is why are volumes declining, and I can’t but wonder if the market is simply over bought. How many cars do we need?
It’s is a dangerous world if we ever discover we simply don’t need stuff anymore.
Aging developed markets, peak car and saturated used market.
Maximus Minimus said:
Economic predictions are based on the fact that humans act pretty much like pre-programmed machines: do the same thing repeatedly using the same stuff. If that was not true, and every move had to be decided individually, the whole edifice would have already collapsed. There will be a wild coyote moment when the air leaves the balloon.
I was even more bemused by the retail figures rising 0.4% in January
If I remember right from a few blog posts ago, this had a mean of 0 and an SD of 1. So, this is within expected parameters. Though it does seem at odds with the CPI.
I have a sneaking suspicion that our economics is factored in similar ways to how they do climate change, deriving science that yields desired results rather than actual facts, and of course facts are not available until they become history…..and we choose to ignore or accentuate them. Is “fake news” worse than “no news”?
“Great! Now let’s raise interest rates then go to war.” This is sarcasm for those of you who don’t get it.
This is reminding me VERY much of February, 2000.
Todd Fisher said:
Check this out. Federal tax receipts declined last year, the first decline since 2002 and 2009. Both these years the US economy was heading into recession. What’s even more concerning is that corporate tax receipts declined 12.4% YoY. That’s MASSIVE. But, these corporations show profits due to…wait for it…non-GAAP accounting “gimmicks”. I think Yellen might be able to get away with 1 hike this year. 0.5% rate is still nothing. But, push it to 1% or higher and this debt (public and private) blows.
There is going to be “The Mother of All Short Squeezes” in the Treasury market once this blow-off top in the stock market has finally exhausted itself. Probably pretty soon.
It’s the GDP deflator. Inflation is spiking….
I miss vegasbob.