Friday, October 16, 2009

More "V" signs (3)

U.S. industrial production in September rose more than expected. Since bottoming out last June, industrial production is up at a 11.8% annualized rate. Japanese industrial production suffered more, but has rebounded even more strongly. European industrial production is also turning up.

I think that when forces like these are set in motion they are very hard to stop. The process started about a year ago when global demand collapsed due to fears of massive bank failures. Inventories rose involuntarily, so production was cut back. Now demand has returned, and inventories are declining, and production is being ramped back up. This is a classic inventory cycle that would be difficult to derail, especially since all the coincident indicators of demand (e.g., commodity prices) are still very strong. In the end, this recovery rests on a foundation of renewed confidence and declining fears. The recovery is now in a positive feedback loop where increased confidence leads to increased demand and production, which in turn leads to increased confidence.

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