Thursday, October 16, 2014

Industrial production is quite strong

September gains in U.S. industrial production far surpassed expectations (+1.0% vs. +0.4%). Gains in the past year are well over 4%, which marks an acceleration relative to the first three years of the current growth cycle, when gains averaged about 3% per year. This stands in stark contrast to the emerging weakness in the Eurozone economy, where industrial production is flat to down a bit over the past year. The U.S. economy is emerging as an island of strength in a sea of slowing growth. Markets worry that the rest of the world will drag the U.S. down, but it doesn't have to be that way.

U.S. industrial production has grown by leaps and bounds compared to the Eurozone. The one bright spot in Europe is the U.K., where industrial production is up 2.5% in the year ended August. Japan's industrial production is down over 5% year to date.

Manufacturing production in the U.S. is up a solid 3.7% over the past year, and the production of business equipment is up by an even stronger 4.6%. These are real gains that point to at least a modest acceleration in overall GDP growth. This is terrific news.

By far the strongest sector of the U.S. economy is mining, shown in the first of the two charts above, which in turn is being led by the surge in crude oil production, shown in the second chart. The output of the mining sector is up over 40% since the end of 2009. This is nothing short of spectacular. Yet it's my impression that these gains have been given short shrift by most analysts. Oil and hydrocarbons in general are not favorites of the politically correct crowd—it's somehow sort of "dirty." But as Mark Perry and I've been saying for years, it's hard to over-estimate just how much the fracking revolution is impacting the overall economy.

Surging U.S. oil production, in combination with slowing growth in Asian economies, is finally working to push oil prices down. Crude prices have plunged 25% year to date! The U.S. economy is going to benefit broadly from a huge reduction in the real cost of energy, the first "lucky break" we've had since the Great Recession. Again, it's hard to underestimate the ripple effects of these very positive developments.

The only thing that poses a serious downside risk to the U.S. economy at this point is a widespread Ebola outbreak. If it weren't for that, we'd have clear sailing for the foreseeable future.


randy said...

Scott, your reasoned analyses are a real gift, thank you.

"Surging U.S. oil production, in combination with slowing growth in Asian economies, is finally working to push oil prices down. Crude prices have plunged 25% year to date!"

The oil price drop seems complicated... at what point is the benefit to consumers outweighed by a slowdown in industry that can't make money at $75 a barrel, and as you note how much does that matter to the overall economy.

Related... a son applying to college. He applied to Geo Sciences among others - which of course is mostly centered around finding hydrocarbons. He also applied to Natural Sciences, considering Physics. The note in a recent post here about fusion advances was encouraging, but there has been many breakthroughs but the endgame still seems to never get here. Do geologists have a 35 year run still?? Lot of variables.

Benjamin Cole said...

Randy---with a son like that, have no worries, he will do well wherever he goes.

Side note to Scott--check your use of the word "underestimate."

Scott Grannis said...

randy: Larry Kudlow estimates that the marginal cost of oil production in the U.S. is $50-60/barrel. If prices were to fall that low, a lot of production would likely be shut down, and that would restore the equilibrium between supply and demand. So maybe there's scope for a significant further reduction in prices. North of $70 and south of $100, producers and consumers are going to be quite happy.

Benjamin: thanks for spotting that error.

Charles said...

What is wrong in Europe? The European economy (especially the financial sector) is configured to an unsustainable pattern of production and consumption. Some countries have unsustainable budget deficits and other countries produce for markets that are funded by these deficits. Nothing is being done to fix the problem. Periodically a country approaches default and a way is found to shift the burden to taxpayers in fiscally sound economies. All this is done surreptitiously. At the same time their governments are wedded to microeconomic policies that severely hamper economic adjustments.

Unknown said...

Hopefully the production in the U.S. can continue to rise as we continue through 2015. Looking at the graphs, it looks like we get good production for a few years then drop hard. I know this kind of market can fluctuate easily, but we need to make sure that our production keeps going up.