November 16, 2012
Is Industrial Production's October Slide Another Storm-Related Victim?
Industrial production slumped last month, and the official blame again points to Hurricane Sandy. That's the third time this week that weak economic data has reportedly been assaulted by the recent storm that tore through the Northeast U.S. Earlier in the week we were told that retail sales were victimized by the big blow, and the same was said of yesterday's awful news on initial jobless claims. Is the hurricane narrative just a convenient excuse to minimize a weakening economy? Maybe, but it's hard to say for sure until we see more data that's free and clear of any weather-related mischief.
Meanwhile, today's industrial production report for October is clearly discouraging, regardless of the reason. Output dropped 0.4% last month, and September's initially reported 0.4% increase was revised down by half to 0.2%.
The cyclically sensitive manufacturing sector led the slide last month, dropping 0.9% in October. “Manufacturing is still not the source of economic energy that it was earlier in the year,” observes Ward McCarthy, chief financial economist of Jefferies & Co. “It’s a sluggish story on manufacturing. It’s not where it was.”
The recent weakness is taking a toll on the year-over-year percentage change in industrial production. The annual pace is still positive, but it retreated to a 1.7% gain in October vs. 12 months ago. That's down sharply from September's 2.8% pace. Industrial production is growing at the slowest rate in more than two years. The margin for comfort is now dangerously thin. If blaming Sandy turns out to be a head fake, there'll be hell to pay.
The decelerating trend is the main concern. As recently as this past April, industrial production was expanding at a 5% annual pace. It's been downshifting ever since. That's a dark sign—if it continues. The 1.7% rate in and of itself isn't all that troubling, if we can keep it. The average annual growth rate for industrial production for the five years before the Great Recession began is 2.3%. Considering how much has changed in recent years on the macro front, expecting a repeat performance any time soon is ignoring reality. A 1.7% rate, however, isn't terrible, if it holds.
That leads us back to Hurricane Sandy. The storm "held down production in the Northeast region at the end of October [and] is estimated to have reduced the rate of change in total output by nearly 1 percentage point," the Federal Reserve advises. No doubt there are many skeptics, but for now the jury's still out until we see the next update. The manufacturing community seems to have expected better, based on the relatively upbeat ISM index reading for October. Still, no one should dismiss the potential for more trouble, especially with the fiscal cliff problems brewing. But it's still premature to declare another recession a done deal, even if the odds are rising.
History is littered with excessively early recession predictions as well as analysts who missed the warning signals until well after the fact. Studying the vintage data across a broad spectrum of indicators suggests that a high-confidence evaluation that a recession is fate tends to avail itself about three to four months after the slump has started. That's still early relative to when the crowd usually recognizes reality. With a bit of prudent econometric probing, it's possible to shorten the timing a bit more. I'll have some fresh numbers on this topic early next week with an update of The Capital Spectator Economic Trend Index.
Meantime, it's too early to yell fire in the theater. But make no mistake: the data updates to come in the days and weeks ahead carry more import for assessing the business cycle. That includes next week's housing updates—existing home sales on Monday (Nov 19) and housing starts on Tuesday (Nov 20), followed by an early release, due to Thanksgiving, on jobless claims on Wednesday (Nov 21). There's a turkey to deal with on Thursday, of course. The question is whether the gobbler will have fowl company in the preceding days on the economic front?
Posted by jp at November 16, 2012 10:29 AM