Wednesday, April 15, 2015

Why the drop in industrial production is actually good news

Industrial production fell much more than expected in March (-0.6% vs. -0.3%), but the weakness was driven by good news: lower oil prices and better weather.

The chart above compares industrial production in the U.S. and in the Eurozone. The U.S. has registered a staggering amount of growth in recent years, leaving the Eurozone in the dust. One piece of good news is that the Eurozone economy is now beginning to grow again after languishing for the past five years. Production in the U.S. has been soft (down 1%) for the past four months, however. Is this the beginning of another economic downturn? No, and here's why:

The chart above is the oil and gas well drilling subcomponent of the the industrial production index. It's down 40% in the past four months, and the Baker Hughes U.S. rotary rig count is down 50% over the same period. The huge decline in oil and gas drilling activity is directly attributable to the 50% drop in oil prices that began last summer. The world now enjoys a glut of oil and sharply lower oil prices, and that's great news. We can now devote more of our economy's scarce resources to the production of other, more useful things.

The chart above shows the utility subcomponent of the industrial production index. March weather was much better than February's, with the result that the output of the utility industry fell almost 6% in March. That's more good news.

Manufacturing production (which excludes utilities), shown in the chart above, was up in March and is only down 0.7% in the past four months. That could easily be attributable to the west coast port slowdowns, but in any event is in keeping with the normal historical volatility of this index. It's still up 2.4% over the past year.

Business equipment production, shown above, was also up in March and a little soft in recent months, but not by a significant amount. It's still up 3.2% in the past year, which is a bit more than overall GDP growth.


Benjamin Cole said...

Excellent post, but it seems like we are seeing a lot of yellow signals of late.

Side note: in Japan there is very low unemployment and still minor deflation once consumer tax hikes are subtracted.

The Fed may want to consider if it could push employment even higher. The Fed may be too timid.

Scott Grannis said...

I don't believe the Fed has the power to "push employment even higher." Monetary policy cannot and does not create jobs. Monetary policy can remove obstacles to growth (e.g., shortages of money), but it cannot directly create growth.

Benjamin Cole said...


The only thing that increases material standards of living is productive behavior.


Our tax codes, our regulations should at least not block, and might actually encourage productive behavior, as determined by free markets.

That said, wave a Ben Franklin in front of my face, and I become very productive.

Central banks are a good idea, in an imperfect world.

Jim said...

Time for US manufacturing to turndown once again in this leveraged economy of ours.