Industrial Production Growth Falls To A 10 Month Low

Industrial Production Growth - MBA Purchase Applications Rise Again

Industrial Production Growth - Despite the slight rise in interest rates, purchase applications increased again in the week of April 12th. Purchase index was 1% from last week when it increased 1%. Composite index fell 3.5% on top of a 5.6% decline because refinancing applications plummeted. Refinance index fell 8% after falling 11%. Year over year gain in the purchase applications index was 7%.

As you can see from the chart below, in the past 10 years purchase applications were only higher 2 times. Applications were higher once in 2015 and once in 2017. 

Applications were relatively strong in the fall and summer of last year, but that’s not the peak selling time. You can see the general ark peaks in the spring selling season. This is the most crucial time of the year; housing looks strong. That being said, the April traffic index was 47 which shows a decline. I’m still waiting on the housing starts report to tell us how housing affected GDP in Q1.

Industrial Production Growth Falls

March industrial production report was weak as industrial production and manufacturing output growth fell. This isn’t a surprise because manufacturing has had a weak year. It’s somewhere between the terrible year that was 2016 and the great year that was 2018. It’s closer to 2018 as growth is still positive. 

Specifically, monthly industrial production growth was -0.1% which was below February’s reading of 0.1% and missed estimates for 0.3% growth. Manufacturing was flat monthly which missed estimates for 0.3% growth. February had a decline of 0.3%, so it’s not like the comparison was tough. Last month’s capacity utilization rate was revised from 78.2% to 79%. In March it declined back to 78.8% which missed estimates for 79.1%.

As you can see from the chart below, on a yearly basis manufacturing growth was 1% and industrial production was up 2.8%. Industrial production growth hit a 10 month low. Seasonally adjusted annualized manufacturing growth rate in Q1 was -1.1%. 

Industrial Production Growth - First decline since Q3 2017. 

Industrial production growth was -0.3% in Q1. On a monthly basis, utilities production was up 0.2% and mining was down 0.8%. Durable goods production was hurt by motor vehicle production which fell 2.5% and furniture production which was down 0.8%. However, production of computers, electric, and aerospace were up. Non-durables growth was 0.1%.

Business equipment production was up 0.5% monthly and 3.8% yearly. It’s possible that businesses are investing in machinery to augment production because the labor market is tight which means it’s tough to find qualified workers at a decent wage. 

Production of consumer goods fell 0.2% monthly and 0.1% yearly. Even though mining production was down monthly, it increased 10.5% yearly. I expect mining production to increase with oil prices in the next few reports. Yearly production of vehicles was worse than monthly growth as it fell 4.5%. 

Weakness in the auto industry should cap GDP growth in 2019. I’m basing that expectation on the high delinquency rate for auto loans in Q4 2018. We will see in May if the rate got better in Q1. Hi-tech production was solid as it was up 0.2% monthly and 3.5% yearly.

Overall, this report tells us what we already knew. Manufacturing and industrial production have been weak in 2019. I’m looking for a pickup in growth in late 2019. However, I wouldn’t be surprised if there is another bad industrial production report in April. The Philly Fed index, which comes out on Thursday, will color my expectations.

Industrial Production Growth - Credit Card Data

Speaking of expectations for a Thursday economic report, the chart below from First Data Merchant Services shows the dollar value growth of credit card spending spiked in March. Growth of 4.27% is consistent with the growth in the first half of 2018.

On the negative side, the final April University of Michigan consumer sentiment reading fell from 98.4 in March to 96.9. That missed estimates for 98. Expectations fell 3 points to 85.8 which was the lowest reading since February. However, current conditions increased 0.9 to 114.2. 

The dreaded gap between current conditions and expectations increased. To be clear, this April reading doesn’t mean much for the March retail sales report. However, I’m more concerned with the trend in consumer spending, not one report.

Growth in personal consumption could drive GDP growth above 2%. Specifically, the Atlanta Fed Nowcast for Q1 improved on Wednesday to 2.4% from 2.3%. This is quickly becoming the most optimistic growth forecast. The international trade report caused the estimate for the contribution of net exports to increase from 0.2% to 0.5%. 

However, the estimate for real non-residential equipment investment growth fell from 4.8% to 2.1%. The initial GDP report will be released on April 26th.

Industrial Production Growth - Fed’s Beige Book

Fed’s April Beige Book report showed the economy grew at a slight to moderate pace in March and early April. That means at the Fed’s May meeting it won’t hike or cut rates, like I already expected. The Beige Book stated labor markets were tight across the country as business had a tough time finding skilled workers and wages grew modestly.

Trade uncertainty weighed on the manufacturing sector. That’s consistent with the industrial production report I just reviewed. A trade deal could boost the sector in the 2nd half of 2019. Prices rose only modestly since the last Beige Book as tariffs, rising wages, and freight costs drove the increase. 

Consumer spending was mixed, but there was sluggish sales growth for general retailers and auto dealers. The March retail sales report could alter that assessment.

Industrial Production Growth - Conclusion

The hard data Citi surprise index is crashing as evidenced by the weak industrial production report. However, that might be a lagging indicator because growth could rebound in the 2ndhalf. 

Interestingly, even with all these reports missing estimates, the Atlanta Fed GDP Nowcast still projects 2.4% growth. The blue chip forecast is at 1.5% which isn’t a disaster either. 

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