Another July Upside Surprise: Industrial Production

Industrial production grew at a substantially faster pace in July vs. June, the Federal Reserve reports. The encouraging news comes on the heels of yesterday’s better-than-expected retail sales report for July. Considering these data points in context with a broader read on economic conditions strengthens the case for expecting economic growth in the near term.

Echoing the narrative for retail sales, industrial production revived last month after a run of sluggish activity. July’s 0.6% increase is the best month for industrial activity since April’s 0.8% gain.

Meantime, the year-over-year trend in industrial production appears to be stable in the 4%-5% range. In other words, there are no signs of cyclical trouble here. The 4.4% increase in industrial production last month vs. its year-earlier level is in line with annual growth rates we’ve been seeing lately; it’s also a healthy pace that suggests that recession risk remains minimal.

That’s also the message when we review the economic profile for July relative to history via the Capital Spectator Recession Risk Index (CSRRI), a diffusion index that reflects the trend for a broad mix of leading and coincident indicators.

With today’s industrial production report in hand, here’s how the lineup of indicators compares to date:
The future, as always, is open for debate, but the recent past looks quite clear in the dark art of calling peaks and troughs for the business cycle. The case for arguing that a recession began in July, it seems, is quickly fading. Data revisions could surprise us, of course, but that’s a low-risk affair when it comes to year-over-year readings. In addition, revisions tend to cancel one another out when looking at a broad set of indicators.
In short, the odds are low that the economy fell off the cyclical cliff last month. That may come as a surprise to some analysts, especially those who rushed to judgment earlier this month when the ISM Manufacturing Index dispatched another mildly weak number for July, as reported on August 1. Some saw that as an ominous sign beyond dispute. Two weeks later, a broader read on the July data begs to differ, reminding once again that cherry-picking economic reports is a dangerous habit in macro analysis.