Disappointing Industrial Production and Manufacturing

Phase 2 Incoming

With the latest RedBook retail sales report, we can now say the consumer is faltering as spending growth fell from -0.1% to -1.2% in the week of September 12th. An increasing number of states are giving out the $300 in weekly benefits which should be a positive. A max payout for the benefits that should have been paid since August 1st is $1,800 which means 6 weeks of benefits get paid at once when the states start paying them. 

That limit shouldn’t be a huge issue as many states are paying them now. Worst case scenario is missing 1-3 weeks. That’s the states that start paying them later this month or early October. Consumers aren’t spending like they are getting money soon. Those on benefits cut their spending in late August. The key remains getting the labor market going again.

As you can see from the chart above, we are now in phase 2 of the recovery. First phase was V shaped. Next phase has slower improvement. In this graph, the economy doesn’t get back to pre-virus growth by the end of 2022. That means, it will take many years to make up for lost growth. 

It should get back all the losses on an absolute basis by the 2nd half of next year. This is a great assessment of the current consensus. But the recovery might be stronger if treatments, testing, and vaccines eliminate the stranglehold that COVID-19 still has over the economy.

This week JP Morgan brought workers back to the office, but they had to rescind that because an unspecified number of workers got the virus. Personally, I think this was bad timing. They should have waited another 2 weeks until Abbott’s tests come out. Also, it was poor planning to halt a program because people tested positive; that was a given. 

MLB didn’t stop the entire league because a few teams had outbreaks. Similarly, JP Morgan should have had a plan before they brought workers back. It’s ridiculous to think that no one will get the virus if you bring them back. You need to determine what you’re willing to live with. If you aren’t willing to have any cases, then bringing people back is a mistake.

Disappointing Industrial Production Report

August industrial production report was bad because of weakness in autos, mining (because of the hurricane), and utilities production. Manufacturing output is still 6.7% below pre-COVID-19 levels and 93% of sectors are still contracting. Industrial production is 7.3% below pre-COVID-19 output. The good news is July’s readings were revised higher. 

Monthly industrial production growth in July was revised up 0.5% to 3.5%. We had the 4th straight month of growth as August was up 0.4% monthly which missed estimates for 1.2% growth. Manufacturing output growth in July was also pushed up 0.5% to 3.9%. Monthly growth in August was 1% which missed estimates for 1.9%. Capacity to utilization was up from 71.1% to 71.4%. Obviously, there is still plenty of capacity.

Yearly industrial production growth actually fell from -7.4% to -7.7% which ended the 3 month streak of higher yearly growth. That comp was 0.1% easier. Yearly manufacturing growth improved for the 4th straight month from -6.9% to -6.6%. And the comp was 0.2% harder. 

Utilities production was down 0.4% monthly and mining production was down 2.5%. Energy sector is being gutted as the low price of oil and the lack of access to credit is killing these firms. EOG stock is down 17.1% in the past month and ExxonMobil is down 15%.

Amazingly, ExxonMobil is down 11 days in a row. Investors haven’t seen anything like this. Generally, stocks don’t go down everyday even if the business is doing poorly. Energy sector is just 2.19% of the S&P 500. That compares to tech which is 27.83% even though some of the big tech firms are in other sectors. 

Amazon is about half of the consumer discretionary sector and it’s 11.4% of the index. Communication services, which includes Facebook and Alphabet, is another 11.02% of the index. A recent rally in materials has only gotten it to a 2.7% share.

Is Manufacturing Coming Back?

Some are bullish on the cyclical recovery in the manufacturing sector; they think the August report was a blip. September Empire State Manufacturing report supports my belief as the index was up from 3.7 to 17 which beat the consensus of 6.5 and the highest estimate which was 15. August report was in concert with the manufacturing reading, as it fell from 17.2 to 3.7 last month. Let’s see if this improvement leads to higher industrial production growth next month.

New orders index spiked 8.8 points to 7.1. Shipments index was up 7.4 to 14.1. Expectations index was strong as it jumped from 34.3 to 40.3. There is great reason to be optimistic as the global economy is reopening. We are still in the beginning phase of this manufacturing recovery. 

New orders index was up 1.9 to 39.1. Shipments index was up 8.2 to 39. As you can see from the chart above, the capex index was up 12.7 to 18.7 which is a new recovery high. We’re well within the range seen in the last expansion. This year’s recession was worse than the slowdown in 2016. Technology spending was up 6.4 to 14.4.

Conclusion

We got a lot of weak economic news on Tuesday as monthly manufacturing and industrial output growth missed estimates. Furthermore, RedBook same store sales growth fell the 2nd week in a row. We are no longer in the back to school shopping season. 

Retailers are now making inventory projections for the holiday shopping season which will be a huge tell as to how the economy is doing. We will likely see another acceleration in growth sometime in Q4 once the COVID-19 tests start going out. 

There should also be a lot of optimism surrounding the potential for vaccines. Some good news on Tuesday was the solid improvement in the September Empire Fed manufacturing index. 

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