Industrial Production Weakens In May, But Annual Pace Remains Firm

Industrial production posted a slight loss in May, the Federal Reserve reports. That’s one more reason to worry about the business cycle in the wake of slower job growth and a deepening euro crisis in Europe. Nonetheless, today’s industrial production update falls well short of a fatal blow for thinking positively. Although industrial production declined last month, the retreat was marginal. In fact, one could argue that economic activity has held up surprisingly well so far in the face of so much bad news coming out of Europe.

Looking at industrial production on a monthly basis, last month’s slight 0.1% drop looks quite modest after April’s strong 1.0% increase. As far as this indicator goes, May doesn’t look like a major turning point to the dark side of the cycle. The future may bring calamity, or not, but there’s minimal sign of trouble by this data point.

As usual, it’s hard to tell much about the bigger-picture trend from monthly data, an obstacle that’s partly minimized by looking at rolling one-year percentage changes. On this front, the numbers du jour continue to reflect a fair amount of strength. Industrial production rose 4.7% for the year through last month. That’s down a bit from April’s 5.1% year-over-year pace, but it’s hard to argue that the change amounts to much more than the usual statistical noise.

To be honest, I was expecting a far worse report for May. The fact that industrial production has effectively held its ground after such a potent increase in April is encouraging. None of this wipes away the very real risks that hang over the global economy if the euro implodes, but if we’re headed over a macro cliff there’s no overwhelmingly clear sign of that in today’s industrial production news.
This indicator doesn’t typically lead the business cycle and there’s no reason to think otherwise. Nonetheless, if a recession is imminent, history suggests that the year-over-year change in industrial production will 1) be far lower than 4.7% and 2) show clear signs of deceleration on an annual basis. Neither of those conditions apply at the moment. That alone doesn’t guarantee that the economy’s not headed for trouble, but it’s one more positive in the optimism column.
Even so, today’s industrial production news, and the sharp slowdown in growth via the June reading of the Empire State Manufacturing Survey for New York state, show “that the U.S. factory sector is struggling to cope with the impact of the renewed recession in Europe and the slowdown in many key emerging markets,” says Paul Ashworth, chief U.S. economist at Capital Economics via RTT News. “This supports our long-held view that U.S. economic growth will be no better than 2.0% this year and, given the financial instability in the euro-zone, the risks to that forecast lie mainly on the downside.”
If so, that implies that U.S. industrial production’s update for June (scheduled for release on July 17) will bring far more negative news. Pessimism, you could say, springs eternal these days. But for the moment, the numbers don’t quite jibe with the worst fears of analysts.