May 15, 2020

Industrial production plunged 11.2% in April after having fallen 4.5 in March as the corona virus caused many factories to suspend operations.  That drop was the largest decline in industrial production in the 101-year history of the series.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) fell 13.7% in April after having dropped 5.5% in March which was the largest drop on record for this series.

Mining (14%) output fell 6.1% in April after having declined 1.1% in March after having fallen 1.4% in February.

Part of the drop in mining is attributable to oil and gas well drilling which dropped by 27.8% in April.   Since the beginning of the year the corona virus has been gradually slowing GDP growth around the globe as country after country introduced stay-at-home orders to slow the spread of the virus.  As economic activity plunged, the demand for oil plunged and prices have fallen from $63 at the end of last year to about $23 per barrel currently.  If we are right that the economy begins a vigorous recovery in the third quarter. oil prices should rebound as well.

Utilities output dropped by 0.9% in April after having fallen 1.9% in March.  Many factories closed, restaurants and bars shut their doors, and retail shops had to close as well.  Hence the demand, for power declined accordingly.

The one category of production that was hit less hard was high tech equipment which declined 3.0% in April.  In the months ahead, firms of all sorts are going to turn to technology to help them find  more efficient ways of running their businesses.

Capacity utilization in the manufacturing sector fell 9.8% in April to 61.1% after having dropped 4.2% in March.  That is now about 16 percentage points below its long term average.

Given all of the above we expect second quarter GDP to decline 60% — the biggest single-quarter drop in history.  While that sounds awful, help is on the way.  That help will take 3 forms.  First, the virus is showing signs of abating.   The $2.5 trillion fiscal stimulus programs  will put checks in the hands of individuals and businesses beginning right now through the end of May.  At the same time the Fed is going to provide $2.3 trillion of credit to make sure that all of the above works the way the government hopes.  While the economy almost certainly fell into recession in March and will continue to decline in April and May, if enough stimulus checks can get written quickly, the economy is likely to turn upwards in June.  If that is the case, we will go through a 3-month recession which would be the shortest on record.  Given this fiscal stimulus we expect Q3 GDP to increase by about 60.0%.

Stephen Slifer


Charleston, SC