Industrial Production Report - Extraordinary Drop

By The Greek - Economy and Markets:

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The Industrial Production & Capacity Utilization Report posted its largest monthly production decline in 34 years and most significant quarterly fall since 1991. The results were not recession driven though, for the most part, as hurricane activity and the strike at Boeing (NYSE: BA) played key roles.

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Industrial Production

Industrial production fell 2.8% in September, and was 4.5% lower than the prior year production. These levels of decline marked 34 and 17-year records, respectively. Clearly, what is shaping up to be a hell of a recession played some role, but extraordinary hurricane activity and a unique union strike really drove the figures' historical significance.

The Federal Reserve Bank, the publisher of the report, estimated that storm related closures of crude oil and natural gas facilities impacted September production by 2.25 percentage points. Moreover, the strike in the commercial aircraft industry reportedly impacted production by another 50 points, so a full 2.75 percentage points of the 2.8% decline were on extraordinary circumstances. That leaves 0.05% of the change to normal economic activity. Bloomberg's consensus of economists was looking for a production drop of 0.5%. Suddenly the data isn't quite as scary is it... However, this report and others started the market lower this morning.

Taking a look at the details that matter, the 7% decline in business equipment was driven by a 30% collapse in transit equipment, due to the aerospace work stoppage. Production of consumer goods fell 1.4%, driven by a 0.7% decline in durables and 1.5% drop in nondurables production. Of note, the automotive products index rose 1.7%, but that came off of a steep drop of 11% in August. Manufacturing production decreased 2.6%, and related capacity utilization sank to 74.5%, a full five points lower than the historical average of the last 35 years. Overall capacity utilization sank to 76.4%, from 78.7% in August, and was a full two percentage points off the consensus estimate.

The main point here is that talking heads were blindly reacting to this report this morning, attributing the drop to export demand deterioration and plenty of factors that were simply not to blame, however likely they may be in the future. As always, you can count on us to pull the weeds out of the garden for you, and present the fruit.


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