After falling for three months American industrial production surged in January but the details of the unexpectedly large increase raised almost as many doubts as they relieved.
The output of American’s mines, factories and utilities jumped 0.92 percent, more than double the 0.4 percent median prediction. But December’s original -0.4 percent figure went further into the negative at -0.67 percent upon revision. This capped the worst quarter for industrial production since the second three months of 2009, the last quarter of the recession.
A late arriving winter for much of the country prompted the production gain as utility output climbed 5.4 percent, the largest one month increase since 2009. Utilities were assisted by an unexpectedly strong boost in manufacturing, up 0.5 percent in January after falling 0.2 percent the prior month. Natural gas productions rose 16.5 percent and electric utilities reported a 4.2 percent increase in usage.
Manufacturing output was driven by the tech and automobile industries, up 2.8 percent and 0.6 percent respectively. Factory output without those two leading sectors rose just 0.3 percent. These two areas have steadily outperformed the balance of the manufacturing base. Overall manufacturing production is just 1.2 percent higher on the year, while automobile output is 6.2 percent higher and tech is up 1.6 percent.
Factory output has been in the doldrums for more than a year and by many measures is in recession.
A stronger U.S. Dollar, the trade-weighted dollar index has gained 12 percent since the beginning of 2015, and a gathering slowdown in the global economy have hurt the industrial sector, about 12 percent of GDP, which is far more dependent on exports than the larger service economy.
Industrial activity over the 12 months to January fell 0.7 percent after dropping 1.89 percent in December and 1.13 percent in November.
Three consecutive negative months in annual industrial production are quite rare and in the past thirty years every occasion, 2008-2009, 2001-2002 and 1990-1991 has been associated with a recession. Though it must be noted that in each of those cases the decline in industrial production lasted far more than three months. In 2008-09 industrial production shrank for 21 months, in 2001-02 15 months and in 1990-91 11 months.
The correlation of a quarter’s worth of annual industrial shrinkage with a recession falls slightly to 89 percent (17 of 19) if you count the instances and recessions going back 100 years.
So far the manufacturing recession does not seem to be spreading to the consumer and the overall economy. Count this as one more distortion in the economy brought on by a decade of zero rates.
Chief Market Strategist
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