US Industrial Output Continued To Weaken In May

Is the US on the cusp of a new recession? The latest numbers on industrial production suggest that business-cycle risk is rising. Why, then, don’t we see confirming signals from other key indicators? Notably, payrolls are still rising at a solid pace (in year-over-year terms)—ditto for real personal consumption expenditures. The industrial sector is clearly weak, and getting weaker, but for the moment this appears to be an isolated downtrend. It could turn out to be something darker, although a broad review of the numbers suggests otherwise, based on current data.

Even industrial output has yet to slip into a formal recession signal, although it’s getting close. Based on annual changes, however, production is still rising, albeit by a soft 1.4% through May vs. the year-earlier level. (Monthly data looks considerably worse, but these short-term comparisons are too noisy to extract reliable signals in real time.)


Another month or two of sliding output would paint a considerably darker picture. Meantime, there are stronger trends elsewhere in the economy to consider. In particular, the annual trend in payrolls posted a solid 2.5% gain through May and initial jobless claims continue to anticipate more of the same in the near-term future. Meanwhile, real personal consumption expenditures are ahead by a respectable 2.7% through April vs. a year ago, and the upbeat numbers on retail sales for May imply that consumption will remain buoyant once all the numbers for last month are published.

The question, then, is whether a weak industrial sector can drag down the US economy? Perhaps, but there’s not much support for this theory in terms of the published numbers to date.

The prevailing wisdom is that the manufacturing sector, which is the critical component of industrial output, is still suffering from the sharp appreciation in the dollar over the past year–an event that’s made US exports less competitive in price terms vs. products denominated in foreign currencies. In addition, the dramatic decline in oil prices continues to reverberate throughout the US energy sector with negative consequences, which adds another weight on manufacturing.

The weakness certainly isn’t helping US growth prospects, but it’s premature to conclude that the deceleration of growth in the industrial sector is pushing the US economy over to the dark side.

That’s also the view of Mr. Market. Using prices from four markets—stocks, oil, the high-yield spread, and the Treasury yield curve—suggests that recession risk remains low, based on numbers as of yesterday (June 15).


Granted, the weakening of industrial output raises the potential for trouble down the road. But until we see the deterioration strengthen and spread to other key indicators, it’s still reasonable to view the data in the industrial sector as an isolated decline.

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