July 15, 2020

Industrial production jumped 5.4% in June after having climbed 1.4% in May after having plunged 12.7% in April and 4.4% in March as the corona virus caused many factories to suspend operations.  The April 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) rose 7.2% in June after having climbed 3.8% in May after having declined 15.9% in April and having fallen 5.1% in March.  The April decline which was the largest drop on record for this series.

Part of the rebound in the factory sector is auto production which has soared in the past two months with monthly increases in excess of 100%, but it was crushed in March and April and remains below the pace of production prior to the recession.

Mining (14%) output fell 2.9% in June, 6.8% in May and 6.1% in April.

Part of the drop in mining is attributable to oil and gas well drilling which dropped by 18.0% in June after having fallen 36.9% in May after having declined 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 a brief low of about $20 per barrel before rebounding to about $40 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 rose 4.2% in June after having declined 3.5% in May.

The one category of production that was hit less hard was high tech equipment which rose 1.8% in June after having declined 0.4% in May after having fallen 2.8% 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 rose 4.5% in June to 66.9% after having risen 2.3% in May..  That is now about 11 percentage points below its long term average.

Given all of the above we expect second quarter GDP to decline 50% — the biggest single-quarter drop in history.  While that sounds awful, help is on the way.  The $2.5 trillion fiscal stimulus programs  has put checks in the hands of individuals and businesses beginning in late April.  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  fell into recession in March and will continue to decline in April,, it cleared turned upwards in May.  If that is the case, we will go through a 2-month recession which would be the shortest on record.  Given this fiscal stimulus we expect Q3 GDP to increase by about 51.0%.

Stephen Slifer


Charleston, SC