In July, Industrial Production increased by 1.0% over June, and was 7.7% higher than it was a year ago. However the June industrial production number was revised down to a decline of 0.1% rather than an increase of 0.1%. Still, even with the downward revision this is a pretty solid showing. The June decline came after a 1.3% surge in production in May. The quality of the increase in July was very high. Total industrial production includes not just the output of factories, but also of Mines and Utilities as well. Changes in utility output often say as much about the weather as it does about the state of the economy.
It is thus useful to look at just manufacturing production rather than total industrial production. In July, factory output rose 1.1%, more than reversing the 0.5% decline (revised from down 0.4%) in June. In May, factory output rose 1.1%, revised up from a gain of 1.0%. Thus the May and June revisions sort of cancel each other out. Relative to a year ago, factory output is up 7.7%. That is very healthy growth, but is off of a very depressed base.
Output at the nation’s mines (including oil and natural gas output) rose 0.9% in July on top of a 0.2% increase in June. In May, mine output fell by 0.7%, in part because of the BP oil disaster in the Gulf of Mexico and the subsequent moratorium on new deepwater drilling. Mine output is up 7.5% from a year ago.
Utility output edged up by 0.1% in July after surging 2.3% in June and 5.9% in May and is up 8.2% from a year ago. The weather is still hot, but July was no more unseasonably warm than June was.
Output of final goods was up 1.3% after a 0.4% decline in June and a 2.0% surge in May, and is 7.9% higher than a year ago. Output of finished consumer goods rose by 1.1% after a 0.6% drop in June and a 2.5% jump in May. Finished consumer goods output is 6.4% higher than a year ago. Output of finished business equipment rose 1.8% after increases of 0.5% and 1.4% in June and May, respectively, and is up 11.7% year over year.
The rise in business equipment output indicates that companies continue to invest in new equipment, which is a real bright spot in the economy. Output of Materials rose by 0.9% in July after an increase of 0.3% in June and a 0.8% increase in May, and is up 8.7% from a year ago. While considerable progress has been made over the last year, a year ago the economy was near its low point of the Great Recession. Even with the rebound, total industrial production is just 93.4% of its average level in 2007. On the industrial production front, we are on the right road, but still have a long way to go.
The other part of this report was on Capacity Utilization. To my mind this is one of the most under-rated economic series around, and it deserves far more attention than it usually gets. Here too, the caveat about utility utilization being tied to the weather as well economic activity applies. As a general rule of thumb, total capacity utilization of around 80% represents a healthy economy. The long term average is 80.6%. A level of 85% or over indicates that the economy is in danger of overheating and is a good signal to policy makers that they need to take steps to slow down the economy or inflation will start to pick up. Such steps would include cutting government spending or raising taxes to bring down the budget deficit, and tightening up on monetary policy by raising short term interest rates.
As the graph below (from http://www.calculatedriskblog.com/) shows, a level of about 75% is associated with a recession. In July, total capacity utilization rose to 74.8% from 74.1% in June (unchanged from May). A year ago capacity utilization was just starting to recover from the record low of 68.2% set in June 2009 and was at 69.1%. Prior to the Great Recession the all time low was 70.9% set in December 1982. Despite the strong rebound over the last year, we are just marginally above the lows set in the 1974-75 recession and the 2001 recession and much lower than the worst points of the 1970, 1980 and 1991 recessions. As with the closely related Industrial Production series, we have seen an impressive rebound over the last year, but are doing so from extraordinarily depressed levels. The rebound in capacity utilization has also been helped by a 0.5% decline over the last year in the total capacity. If some factories, mines and power plants close for good, it is easier to keep the remaining ones running at higher levels.
Since weather can influence the utility numbers, it is important to just look at factory utilization as well. For the most part it tells the same story. Factory utilization rose to 72.2% in July from 71.4% in June. In June factory utilization actually declined by 0.3 points from 71.7% in May. The cycle and record low was set in June of 2009 at 65.4% and a year ago was just starting to recover with just 66.6% of capacity in operation. The long term average for factory utilization is 79.2%, and the pre-Great Recession low was 67.9% set in December 1982.When you think about it, the strong growth we have seen in finished business equipment output is all the more impressive when you consider how much of the existing equipment is sitting idle. On the other hand, total factory capacity has declined by 0.7% over the last year, so some of that idle capacity has gone away for good as factories have been closed permanently.
The report also breaks the capacity utilization down by stage of processing. Facilities that produce finished goods were operating at 73.6% of capacity, up from 72.7% in June and above the 73.3% level in May. A year ago those facilities were only operating at 68.7% of capacity. The low was 67.5% set in June of 2009 and the long term average is 77.5%, so we are just a little more than half way back to average. Output of crude goods, which are mostly commodities and thus more tied to mining than factories rose to 85.1% from 84.4% in June and 84.2% in May. A year ago crude good output was at just 79.5% of capacity, and the long term average is 86.5%, so on that front capacity utilization is almost back to normal. Between crude and finished goods are semi-finished goods (think wheat, flour, bread to keep the stages of production straight). There we still have a long ways to go. Semi-finished utilization was only 72.7%, up from 72.1% in June, and 71.8% in May. A year ago those facilities were operating at just 66.5% of capacity. However the long term average is 81.6%, so we still have a long road in front of us to get back to normal.
A big part of the increase in factory output was due to higher auto production at companies like Ford (F) and General Motors, which now looks to be on track for an IPO within the next month or so. Output of cars and light trucks (and the parts to make them with) jumped by 10% in the month. Even so, it was not all about pickup trucks, as even excluding the auto sector, factory output rose by 0.6%. That is a 10% increase in a month, not year over year and is extremely impressive, especially considering that the entire industry was more or less at death’s door last year. On a year over year basis, output of automotive products is up 26.4%. That doesn’t just mean good things for the final assembly firms like Ford and Toyota (TM) but also indicates that things are going well for the suppliers like TRW Automotive (TRW).
Unlike the news we got today from the housing sector (see Housing Starts Still Weak) this was a very strong and positive report. It indicates that the slowdown we saw in June was just a pause in the recovery of the manufacturing sector in particular, not the start of a new downturn. Don’t get me wrong though, manufacturing is still very depressed and operating at levels comparable to the worst levels seen in most prior downturns, However, the rebound has been very strong, and we are in a much better place than we were a year ago. The direction is right, and we are accelerating, but given just how bad things got in the wake of the popping of the housing bubble and the freeze up in the credit markets, we still have a very long road in front of us.