Wednesday, September 15, 2010

Industrial Production Grows

The Lehmann Letter (SM)

Today's Federal Reserve report on industrial production and capacity utilization was encouraging:

Both continued to grow in August, building on a year of recovery and improvement for manufacturing, mining and public utilities. That's good news.

Capacity Utilization

(Click on chart to enlarge.)

Recessions shaded

Capacity utilization stands at 74.7%. That means that industry now produces 74.7% of the maximum it could produce. Round that number to 75% and plug it into the chart, and you could say that industry is making a snappy recovery. Capacity utilization has improved by over 5% from its recent trough during the worst post--World War II recession.

But the recovery has slowed in recent months. Capacity utilization was 74.0% in May, so that we've gained less than 1% over the past quarter year. You can see from the chart that we have to push our way back to at least 80% to claim that industry is thriving once again.

What can be done to accomplish this? Aggregate demand must recover and thereby provide a market for the goods industry produces. Residential construction and auto sales are the best simple measures of demand's strength. Think of all the lumber, steel, glass, rubber, cement and other materials these industries consume directly. And then think of all the furniture, furnishings, heating and air conditioning units and kitchen and laundry appliances that go into new homes. That gives you an idea how strongly industry's wagon is hitched to building's and autos’ horses.

New home-sales and home-building data will be out soon. We'll take a look at that to gauge the overall economy's health.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2010 Michael B. Lehmann

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