Wednesday, February 15, 2012

Industrial Output: Sign of Trouble?

The Lehmann Letter (SM)

There is a paradox in the current economic recovery: Most indicators are up, but housing is flat. That's why today's Federal Reserve release on industrial production may cause concern:

The Fed reported that industrial production (manufacturing, mining and public utilities output) failed to grow in January. Does this indicate that housing is dragging down the rest of the economy?

Probably not.

The chart displays industrial production in another light. It asks and answers the question: What is the current level of output expressed as a percentage of the maximum? You can see that capacity utilization rebounded sharply from the depths of recession. That reflected business restocking inventories depleted during the downturn. Restocking is over, and now we are in the tough slog of trying to return production to a normal level.

Capacity Utilization
(Click on chart to enlarge)

(Recessions shaded)

From examination of the chart you would probably agree that capacity utilization must return to 80% before we can be satisfied that industrial output is strong. The Fed reported capacity utilization of 78.5% in January. That is close to the 80% that signals a healthy economy.

Bottom line: Don't be alarmed by today's report that industrial production was flat in January. Industry continues to make steady progress. One month's data don't end a trend. The chart shows strength and will probably continue to do so in the coming months.

But housing does remain a concern. There will be a number of important
residential-building indicators released in the coming weeks. Stay tuned.

(To be fully informed visit

© 2012 Michael B. Lehmann

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