Industrial production still looks healthy

U.S. May industrial production was a bit weaker than expected, but the improving trend is likely still intact: production is up at an annualized 4.6% pace over the past six months, and up 4.7% in the past year. German industrial production through April shows clear signs of weakness, but note in the first chart below how much stronger Germany's recovery to date has been relative to the U.S. Germany is suffering from the PIIGS crisis in recent months, to be sure, but the Germans have still managed to stage a very impressive recovery in recent years.

U.S. manufacturing production (which strips out the contribution of utilities) was also a bit on the weak side in May, but it nevertheless has risen at an impressive 6.2% pace over the past six months. I doubt the recent weakness is evidence of a new downturn; it is more likely a sign that the manufacturing sector is simply taking a breather. Everyone has turned more cautious in recent months, but that is not necessarily a reason to think that the economy is entering a new downturn. 

Over the years, I've learned that there is wisdom and logic behind the argument that if a business fails to grow, then it will eventually die; but the same is not true for economies. Just because the U.S. economy is suffering from a huge output gap and real growth is below its long-term 3% trend, is not a reason to fear another recession. I prefer the glass-is-half-full approach: despite all the headwinds it faces (e.g., the Eurozone crisis, the approaching "fiscal cliff," the unprecedented collapse of the housing market, the surge in the size and burden of federal government, the potential inflation risk posed by the Fed's unprecedented expansion of its balance sheet), the U.S. economy is still managing to grow, and that is a testament to its inherent dynamism and the hard-working culture that still reigns in most sectors of the economy.