Industrial Production Lull Shakes Stocks

Economic Analysis

The Federal Reserve published Industrial Production data for the month of April this morning which added to economic concerns and helped weigh down the market. The Dow Jones Industrials Average (NYSE: DIA) dropped a half of a percentage point on this and other negative news Tuesday.

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Industrial Production Lull Shakes Stocks

Industrial Production was unchanged in April, a result that fell short of economists’ consensus expectations for 0.4% expansion, based on Bloomberg’s survey. Meanwhile, March production was revised down to +0.7% from 0.8%, and February’s activity was revised to record a decrease in production of 0.3%, versus the previously seen increase of 0.1%.

The earthquake in Japan weighed on industrial production, as automobile assembly activity was impeded by related supply shortages. Total motor vehicle assemblies dropped from an annual rate of 9.0 million units in March to 7.9 million units in April. Still, this does not explain the unfavorable changes to February and March. We know from our tap on the economy that extreme weather cost February some, and that March’s growth was likely affected by balancing or normalization. It’s funny that we are being vindicated now by late revisions to February economic data, as we had warned the economy would soften.

The case for a slowing industrial sector, and especially the manufacturing base, is supported by recent regional data, to a degree. The Empire State Manufacturing Survey was reported Monday by the New York Fed. The index fell to a mark of 11.88 in May, down from April’s 21.7 reading. While any figure above zero indicates growth, it’s still important that the pace of expansion was weakened.

Within April’s Industrial Production Report, we saw Capacity Utilization deteriorate to 76.9%, from 77% in March. Capacity Utilization has yet to fully recover, as it remains 3.5% below its long-term average (1972 to 2010). Clearly, with progress in inventory management and operations efficiencies gained over the years, capacity is more significantly short of more recent times’ usage. The report notes utilization highs of around 85% in the mid-90s and 80s. That said, utilization is significantly up from the 2008-2009 low of 67.3%. We suppose the capacity being measured only includes those plants that have not been shut down, which would mean the nation’s capacity utilization is overstated.

Manufacturing, a subset of the overall industrial measure, marked a 0.4% decrease in production in April. Manufacturing Capacity Utilization also dropped four-tenths of a point, to 74.4%, still 4.6% below its long-term average, but 10% above its 2009 trough.

Highlighting the main culprit behind the month’s drop-off, the output of motor vehicles and parts fell by 8.9% in April. That said, the report also noted “significant” losses in output in the following industries: primary metals; electrical equipment, appliances and components; and furniture and related products. We should note that weakness was not universal, with expanded production in: nonmetallic mineral products, fabricated metal products, machinery, computer and electronic products, and aerospace and miscellaneous transportation equipment. Durable goods production overall fell by 1.0%, while nondurables expanded by 0.1%.

Interpretation of manufacturing data now must account for the effects of the earthquake in Japan. Yet, other data across other segments of the economy seem to also show softness or are threatening softness. A slowing of economic growth has been clearly evident, and the Federal Reserve has acknowledged it as well. Certainly, the price of gasoline and other commodities has weighed on consumer sentiment and spending. Emerging nations, China and India, have put the reins to growth via constraints to their respective banking systems. Thus, an American manufacturing sector that had been surviving through domestic softness via the lift of the developing world is now facing even tougher times at home and in Europe combined with less support from Asian demand.



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