Industrial Production Growth Solid | Import & Export Prices Decline

Industrial Production Growth Is Solid

Since industrial production is a hard data report, it will settle the score on whether manufacturing growth was strong. I was unsure of the situation in August because many soft data reports conflicted with each other.

The final tally is manufacturing was solid, but not as amazing as the ISM PMI indicated. That’s not a surprise because the ISM PMI has often been too positive in this expansion.

Industrial production was up 0.4% month over month which met estimates and last month’s report. July’s report was revised up from 0.1% growth. Month over month manufacturing growth was 0.2%.

This missed estimates and July’s growth which were 0.3% growth. The capacity to utilization rate was 78.1% which missed estimates for 78.3%. It was up from July’s rate which was revised from 78.1% to 77.9%.

The chart below shows the components of the industrial production report. As you can see, the electric and gas utilities component was up 1.18% which is up from July increase of 7 basis points.

The mining industry was up 0.67% in August which is an improvement from 0.67% in July (there was an improvement in the thousandths place). The overall index technically improved if you look at the hundredths place as it went from 0.36% to 0.41%.

Finally, the manufacturing segment went from 0.33% growth to 0.249%. As you can see, it was just one, one hundredth of a point away from being rounded up which would have met estimates.

Industrial Production Growth - Auto production was actually up 4% even though it has seen weakness recently. 

Retail sales for autos fell 0.8% in August. Autos couldn’t boost the whole manufacturing segment as non-industrial supplies including construction supplies had no growth.

Output of hi-tech goods and business equipment were both up solidly. If we think back to the Beige Book, the Fed was correct to say the manufacturing sector was seeing moderate growth.

The ISM PMI was misleading. Mining is helping boost the overall sector to help GDP growth, but the industrial sector isn’t seeing the fastest growth of 2018, like I mentioned. The best growth rate of the year was April which was up 1.13%.

Capacity to utilization is still below the April peak of 78.2%. It should increase in the next few months. It’s good that there is plenty of slack in the economy.

The first sign of resistance should be when it gets close to 79.6% which was this expansion’s peak in November 2014. That doesn’t have to be the peak as previous cycles peaked higher. However, there has been a multi-decade downtrend in the cycle peaks.

Industrial Production Growth - Import & Export Prices Reflect Strong Dollar

In August, on a month over month basis, import prices were down 0.6% which missed estimates for a decline of 0.1%.

July’s reading was revised from flat to down 0.1%. As you can see from the chart below, import prices were up 3.7% year over year, which was down from the 4.9% increase in July which was revised up from 4.8%.

Import price growth fell because of the strong dollar. Prices for imported petroleum fell 3.9%. Excluding petroleum, prices fell 0.2%. Prices for foods and feeds were up 0.4% and prices for capital goods were down 0.1%.

Prices for imported finished goods, vehicles, and consumer goods were all flat. In the finished goods category, on a year over year basis, consumer goods was the leader as it increased 0.6%.

Industrial Production Growth - American Famers In Trouble

Export prices also fell on a month over month basis as they were down 0.1% which missed estimates for 0.2% growth.

They fell 0.5% in July. Prices for finished exports fell 0.1% for vehicles and consumer goods. Capital goods prices were up 0.2%. Prices for agriculture exports were up 0.2% on a month over month basis and down 1.7% on a year over year basis.

This is bad news for farmers. American farmers are in trouble as the trade war with China is leading to China limiting its purchases of American farm goods.

As you can see from the chart below, the difference between the deliverable commodity price and the futures price is negative for American producers of soybeans and positive for Brazilian farmers.

They usually track together based on the supply and demand aspects of the industry, but now the trade war is causing China switch to Brazilian soybeans which is helping Brazil and hurting America.

This is the first time American farmers are getting a negative basis for soybeans in 10 years.

As you can see from the chart below, soybeans are the top U.S. export to China. Soybeans have grown as a percentage of exports in the past 20 years from the single digits to over 50%.

Motor vehicles are about 20%; both civilian aircrafts and electronic integrated circuits are in the teens. This shows you the other industries which could be hurt by China ratcheting up its defense in the trade war.

China seems to be matching every offensive attempt made by America instead of giving in to President Trump’s demands.

Industrial Production Growth - Prices Weak, But Fed Raising Rates Anyway

Getting back to the main takeaway from the import export prices report, price pressures are weak because of the strong dollar.

If the dollar index falls back towards $90, pressure could resume. Even though global prices and prices for consumer goods are weak, the Fed is raising rates because it fears wage inflation since the labor market is getting close to losing all its slack.

As I mentioned previously, it appears there is still enough slack in the economy because the capacity to utilization rate is below the November 2014 peak.

To be clear, I think there is enough slack in the labor market to avoid severe wage inflation in the near term. However, it’s fair for the Fed to try to get out ahead of the issue.

The Fed can’t limit inflation immediately through rate hikes once inflation gets too high. In theory, it could have not raised rates at all until 2019 and then raise them 1% at each meeting with a press conference, but that would shock the markets.

 

 

Spread the love

Comments are closed.