Brian Andrew, CFA

The Long View

Earlier this week we received updated measures of industrial production. These are closely watched data points because they provide insight into whether or not the economy is picking up steam. Beneath the headline numbers is interesting information that may shed light on the U.S. economy's accelerating pace of growth. Rather than look only at the most recent information, reviewing the data series over a long period of time provides some clues to the changing economy.

Industrial Production

This production measure represents the growth in output of the manufacturing, mining and utilities industries. In addition, capacity utilization is also reported when the data is released, which explains how much slack we have in those industries. The amount of slack is important because it represents the amount of unused capacity which can be brought online without raising costs, i.e., pushing up on inflation.

Production rose .7% in April – the third monthly increase in a row. Previous months saw a slight downward revision, but overall output has advanced 3.5% in the last year. The chart below shows the percent change in production from a year earlier, each month, going back to 2000 (grey vertical bars represent economic recessions). Over this period you can see that the current rate represents healthy growth as there are only a few instances of even faster production growth. In addition, you'll notice that the rate of growth was actually negative between late 2014 and early 2016.

Source: Federal Reserve statistical release May 16, 2018

This was a mini‐recession in the manufacturing part of our economy due to slowing global economic growth. Since then, however, we've seen improvement in the rate of growth both globally and here at home. As pointed out last week, the industrial portion of our economy is smaller than it once was; however, it still contributes jobs that provide better income (an average hourly wage of more than $26) than many other sectors of the economy. So higher industrial production is a good thing!

Last month's rise was supported by increases in all of the major market groups. These include consumer goods, business equipment, defense and space equipment as well as construction and business supplies. Business equipment saw the second best growth rate. That's important because, as we've discussed, an increase in overall business investment provides evidence that the rally in economic growth can be sustained.


One of the bright spots in the report was the uptick in growth from utilities. Production here grew 6% during the last twelve months! Because energy is a major input into any industrial production, an increase here provides further evidence that the economy is improving at a faster rate.

Using the long view to look at this series also provides some evidence of how the economy is changing. The chart below represents the index for electric and gas utility industrial production. You'll notice the long, steady rise in the index during most of the period represented until the financial crisis in 2008/2009. From that point forward, the index moves up and down quite a bit, yet stands very close to the same level we saw in 2008. Why?

Source: Federal Reserve statistical release May 16, 2018

There may be two things at play here. First, as our economy becomes more energy efficient, we use less energy for the same level of industrial production. Second, you can see the decline back in 2014/2015 (see red arrow) that represents the mini‐recession mentioned earlier. You might also notice that when compared to prior declines, this one was quite significant. It is also interesting to note that the decline is actually more dramatic than those during the early 1980s, early 2000s and financial crisis recessions (see shaded circles).

Since then, however, we've seen an advance in electric and gas utility production that would imply a healthier industrial economy. This gives us some confidence that we may continue to see economic growth pick up throughout 2018. The faster growth rate for industrial production also bodes well for companies' earnings in the industrial, mining and utilities segments of the stock market. These stocks may see firmer prices as a result.

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Views and comments expressed in this blog are those of the author and do not necessarily represent the positions of Cleary Gull or fellow Cleary Gull associates.