Industrial production falls again amid global slump
Mar 16th 2009 2:00PM
Updated Dec 4th 2009 11:10AM
If you could pick just one statistic to sum up the current economic condition of the United States, what indicator would it be? For some, it might be the unemployment rate; for others, corporate earnings.
Another candidate would have to be industrial production, a reliable indicator of the nation's overall productive capacity and strength. And lately, there hasn't been much strength: industrial production fell for the fourth straight month in February, down 1.4 percent, as declining exports and auto sector cutbacks hurt factory output, the U.S. Federal Reserve announced Monday.
A Bloomberg News survey had expected industrial production to fall 1.2 percent in February. Industrial production fell a revised 1.9 percent in January.
Also, capacity utilization fell to 70.9 percent -- its lowest level on record -- from 71.1 percent in January; the Bloomberg News survey had expected a rise to 72 percent.
Few segments spared
February's decline spared few segments: factory output fell 0.7 percent; nondurable goods, 1.2 percent; consumer goods, 0.7 percent; business equipment, 1.3 percent; construction, 2.2 percent; utilities, 7.7 percent; and materials, 1.5 percent.
What's more, U.S. industrial production has fallen 11.2 percent in the past 12 months. Economicpicdata has a useful chart that details the breadth and depth of the decline.
Also, March's U.S. industrial data mirrored results from the typically indicative New York region. In a separate report, the Empire State Manufacturing Survey declined to -38.2 in March from -34.7 in February, the Federal Reserve Bank of New York announced Monday. Economists surveyed by Bloomberg News had expected the index to rise to -32.0.
Current U.S. industrial production levels and the bearish trend are negative enough in their own right to keep leery investors on the sidelines, out of cyclical stocks. Industrial production in the U.S. has basically been falling since the winter of 2008.
Industrial slump: Global in scope
Sadly, however, the industrial slump is not merely a New World phenomenon -- it's global. The major economic zones of the European Union, China, and Japan are all experiencing similar industrial contractions, with export-dominant China and Japan acutely feeling the sting of lower demand for exported goods.
The slump can be attributed to many factors, of course, but one key variable was the the near universal integration of global markets, which saw several major industrial producers, and in particular China, take the global stage this decade. When the global economy was growing at better than four percent earlier this decade, markets were able to absorb most of that added supply. But with both the developed and developing world now in recession, there are not nearly enough buyers for industrial goods, resulting in industrial production output declines and goods surpluses in every region. Simply, right now in the world there's a surplus of just about everything -- except financing and jobs.
Economic Analysis: For investors, the United States' fourth straight monthly industrial production decline and record-low capacity utilization rate are obviously bearish data points, but U.S. stock markets did not react that negatively to the report, in part due to discounted sentiment. Given the sector's more than year-long decline, Wall Street has already factored in negative data from the sector and expects nothing better.
In other words, institutional investors believe U.S. manufacturing conditions are so bad now, they can't get much worse. Hence, U.S. industrial production will likely move the market only when conditions improve.
That perspective does not hold, however, regarding global manufacturing conditions. Here, investors believe conditions could worsen substantially. Perhaps the biggest imbalance of the recent expansion, after U.S. personal debt, is related to the dependence of the world on U.S. consumption. The world failed to create major regions of consumption outside the United States, and the global economy is paying for that mistake now. Hence, in order to get out of this slump China and the rest of Asia, Europe, and Latin America must increase consumption locally to increase regional commercial activity and demand. Only a portion of that new demand will come from U.S. consumers, moving forward, and in the process create a more-balanced global economy.