May Industrial Production

The Federal Reserve’s measure of Industrial Production slipped 0.1 percent in May following a rather strong April that boasted a 1.0 percent increase (revised down 0.1%).  Excluding the previous month, this indicator has been rather weak lately as it has been down three out of the last four months.  Also included in the central bank’s release is capacity utilization.  This ratio of output to capacity retreated to the level it was at in February (79 percent) after a large improvement in April.

After having climbed 1.4 percent in April, production for consumer goods fell 0.2 percent in May.  Manufacturers made 1.3 percent fewer durable goods.  A notable slowdown came from the output of automobiles as they fell 1.9 percent for the month.  Consumers purchased more electricity which help nondurable production grow by 0.1 percent.  Non-energy nondurables fell 0.2 percent thus dampening the overall output for consumer items expected to last less than three years.  Producers continued to increase the manufacturing of business equipment.  By edging up 0.3 percent, this component continued its string of monthly improvements in 2012. Nonindustrial supplies were led lower by construction supplies as they fell 1.2 percent.  Finally, materials to be processed further in the industrial sector managed a slight improvement of 0.1 percent.  The durable component of such materials contracted 0.5 percent.

The tone of this release was not as cheery as Atlas would like to see, but after an increase of one percent in April, unless the industrial output falls quickly in June, this segment of the economy will add to GDP for the second quarter of the year. It is worrisome to see consumer durable goods fall since Americans tend to part with larger sums of cash (items expected to last longer than three years are relatively expensive) when they are feeling confident.  The capacity utilization is still running below its long run average, so inflation caused by demand outpacing the industrial sector’s ability to supply the goods is not likely to be an issue in the near future.  This indicator’s month-to-month change will need to be paid attention to closely in the months ahead.  The recent weakness is a potential canary in the coal mine silently warning about an oncoming slowdown in the country’s economy.  (by C. Cox)