October 16, 2020

Industrial production declined 0.6% in September which was well below the consensus forecast which called for an increase of 0.5%.  That is the first decline in production since April.   As the economy re-opens the manufacturing sector is turning upwards, but it clearly slipped in September.  As shown below, production is still 7.1% below where it was in February — prior to the recession.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) fell 0.3% in September after registering gains of 1.2% in August, 4.2% in July and 7.6% in June.

The decline in factory production is largely attributable to slowdown in the past of motor vehicle production which declined 4.0%.  However, automobile production soared in the May, June, July period with monthly increases in June and July in excess of 100%.  As a result, the level of auto production in July is now back to where it was prior to the recession.  The same is true for car sales which are also back to their pre-recession level.

High tech production was hit less sharply than most other sectors of the economy as business people turned to technology to help them cope with the fallout from the virus.  As a result high tech fell only slightly during the recession, and has now surpassed its pre-recession high.

Mining (14%) output rose 1.7% in September after having fallen 2.4% in August and rising 3.7% in  July.  Mining has fallen 14.8% in the past year.

Part of the drop in mining is attributable to oil and gas well drilling which has plunged in the past five months.    As economic activity plunged in response to the global shutdown caused by the corona virus, the demand for oil plunged and prices fell from $63 at the end of last year to a brief low of about $13 per barrel before rebounding to about $40 per barrel currently.  However, during the recession demand fell far more sharply than production.  As a result, oil inventories were excessively high.  Drillers will have sharply curtailed production and now the excessive level of inventories is depleted.  They are back to normal which means that oil production should continue to rise as the economy recovers.

Utilities output plunged 5.6% in September as the weather turned somewhat cooler and there was less need for air conditioning.

Capacity utilization in the manufacturing sector declined 0.2% in September to 70.5%.  That is now about 7 percentage points below its long term average.

Second quarter GDP declined 31.4% — the biggest single-quarter drop in history.  While that sounds awful, help is on the way.  The $3.0 trillion fiscal stimulus program  has put checks in the hands of individuals and businesses beginning in late April.  At the same time the Fed has expanded its balance sheet by $3.0 trillion primarily through its  purchases of U.S. Treasury securities.  While the economy  fell into recession in March and continued to decline in April,, it cleared turned upwards in May.  If that is the case, we went through a 2-month recession which would be the shortest on record.  Given the fiscal stimulus we expect Q3 GDP to increase by about 28.0% followed by 7.0% growth in Q4.

Stephen Slifer


Charleston, SC