Industrial Production Down Again In August; Past Revisions Suggest May Be Worse Than That

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Industrial production contracted again in August at a rate (month-over-month) similar to that in June. That would suggest the rebound in July was the aberration since IP has now declined in seven out of the eight months this year. The year-over-year growth rate of just 0.9% would have been the worst of the “recovery” except that downward revisions forced June’s Y/Y rate to be a slightly lower at 0.8%. In any case, the past four months number among the five lowest annual gains going back to 2010.

ABOOK Sept 2015 IP SA YYABOOK Sept 2015 IP SA MM

These production levels are still being aided significantly by the oil and gas sector despite the fact that activity in energy has clearly slowed with non-transitory energy prices. While not growing anywhere close the almost 20% Y/Y rate from December, even at 5.2% in August that is still a seriously positive contribution overall; suggesting that the declines in production away from energy are a bit more severe and that so far are just the beginning.

ABOOK Sept 2015 IP Oil Gas

That leaves more evidence of an already-existing slowdown or even contraction though it has yet to produce equalizing terms to the sales level. Coincident to the renewed ugliness in top-level retail sales in August, the update for Total Business Inventories (through July) shows once again no progress against the supply imbalance. The ratio of total inventory to total sales is stuck at 1.36, having been there for all of 2015 (except February which was 1.37).

ABOOK Sept 2015 IP Total Busn Inventory

From the standpoint of capacity utilization, the renewed decline in August is unsurprising. However, given the radical benchmark revisions from a few months ago (dealing with trend-cycle problems only revealed in the statistics to 2012-13 so far) there are indications that the capacity utilization problem is minimized by the statistical choices of the Fed (the Federal Reserve constructs, maintains and issues the IP figures). Where capacity utilization is back down close to the 2015 lows at 77.6%, the peak level from last year may be simply an artifact of the trend-cycle difficulties in reconciling forecast expectations with an undesirable reality where the recovery wasn’t.

ABOOK Sept 2015 IP Cap UtilABOOK Sept 2015 IP Cap Util Revisions

Because so much activity “disappeared” in 2012 and 2013, the only way for the Fed’s statistics to show a significant increase in the utilization rate in 2014 was by significantly reducing overall capacity growth (capex and productive business investment). Even with reduced capacity expansion in these revisions, the deceleration is just starting for 2015.

ABOOK Sept 2015 IP Capacity Growth RevisedABOOK Sept 2015 IP Capacity Growth

As with the employment figures (which would be related in reality if not statistics, since productive business investment, quite unlike financial business investment, is a primary conduit of wage growth), I think the net effect of this statistical rejiggering is to overstate progress especially last year, thus calling into question how much the industrial and production economy so far this year has already met retrenchment. With retail sales already lingering at levels far closer in association with recession than not, it would seem that the chances of further revisions in this area are high (which needs to be factored now; waiting two years for the Fed to tell us IP was worse than thought helps nobody but historians).

The difference between those views is inventory anyway, so it may only amount to questions surrounding timing. What we can infer from the data we have now is the same problem as has been presented since this year began, only one more month further advanced. Production is slowing or contracting already without any so far detectable change in over-investment in inventory throughout the supply chain. That has to change at some point, but with sales (and production) following the “dollar” it does not look good for a last-minute “demand” surge as economic salvation. The full weight of recession looms.