November 15, 2019

Industrial production plunged 0.8% in October after having fallen  0.3% in September after having jumped 0.7% in August.   However, a large part of the declines in both September and October  were  attributable to the General Motors strike which ended at the end of October.  During the past year industrial production has fallen 1.1%, but one year ago it was climbing at a 4.9% pace.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) fell 0.6% in October after having declined 0.5% in September after having risen 0.6% in August..  During the past year  factory output has declined 1.5% (red line, right scale).  Much of the September and October declines were attributable to the G.M. strike.  The Fed indicated that factory production excluding motor vehicles and parts fell 0.1% in both September and October.

To a large extent the prolonged drop in factory production is being curtailed by the trade sector and the impact of tariffs on both manufacturing firms that import components used in the production process from overseas, as well as firms that export goods to other countries because of their tit-for-tat increase in tariffs.  The ISM exports index plunged to the same basic level that we saw in the midst of the recession.  However, it rebounded sharply in November which suggests that most of the trade-related impact on growth is behind us.

Mining (14%) output fell 0.7% in October and 0.8%  in September.  Over the past year mining production has risen 2.6%.

However, over the last year oil and gas well drilling activity has fallen 19.0%. But a year ago drilling activity had risen 17.5%. .  Despite the drop-off in drilling activity crude oil output has surged in the past year.  The implication is that productivity in that sector continues to climb.

Utilities output fell 2.6% in October after having jumped 1.9% in September.  This component of industrial production is always volatile.  During the past year utility output has fallen 4.1%.

Production of high tech equipment rose 0.1% in October after having risen 0.4% September, 1.6% in August, 1.8% in July and  1.2% in June.  Over the past year high tech has risen 5.6%.  It is  likely that growth in this category has been retarded by reduced demand for technological products from outside of the U.S. where economic activity has slowed noticeably.   However, this series has still been climbing at a respectable rate probably because the tight labor market  is encouraging firms to spend money on technology to boost output without adding to headcount.  This should lead to continued  strength in nonresidential investment which will, in turn, lead to a sustained pickup in productivity.

Capacity utilization in the manufacturing sector fell 0.4% in September to 75.3% after having risen rose 0.3% in August.  It remains somewhat below the 77.4% level that is generally regarded as effective peak capacity.  As long as demand Trump’s trade policy remains unpredictable, factory owners will be reluctant to spend more money on technology and re-furbishing or expanding their assembly lines to boost output.

Given that the economy remains relatively robust the manufacturing sector should tend to climb in the months ahead, but the higher tariffs are curtailing its rate of growth.  Look for little change in industrial production for the foreseeable future.

Stephen Slifer


Charleston, SC