Wednesday, September 16, 2009

Industrial Production - Rewind

As expected, the August rise in industrial production was led by another jump in output of motor vehicles and parts, up almost 6% on the month. But non-auto manufacturing production also strengthened in August, managing its best turnout since the recession began excluding last October, when manufacturing rose following a disruption from hurricanes and a Boeing strike. Although the ISM manufacturing survey is not a precise guide to factory output, the latest readings suggests the pickup in activity is becoming more widespread as inventory cuts moderate and domestic business investment and exports turn higher.

The main driver of the recovery has been that businesses are raising output to close the gap with sales. Production was cut very deeply early in the year, when businesses were assuming a continued fall in demand. With sales firming at a much higher level than anticipated and, more recently, returning to growth, manufacturers are scrambling to raise output and the automotive-led moderation in the pace of inventory liquidation is now giving way to a similar pattern across other industries.

Although the turnaround in manufacturing has generally been stronger than anticipated, at the current pace of growth in industrial production, it would still take around two-three years for capacity utilization to rise to its prerecession level of around 79%. Since this recession has been especially deep and slack is unusually large, the case for low inflation and low policy rates in 2010 is a strong one but may not hold past that.

From Fusion research by Doug Lomma

posted by Peter Greene