In August, industrial production rose 0.8% from July, and the July increase was revised from a gain of 0.5% to a gain of 1.0%. In manufacturing, production was up 0.6% following an upwardly revised gain of 1.4% in July (was 1.0%).
Output at the country’s mines rose 0.5% following a 0.6% gain in July. Utility output, which can be affected as much by the weather as by economic activity, rose 1.9% in August following a 1.6% decline in July.
These increases are a big turnaround from what we had been seeing. On a year-over-year basis, total industrial production is still down 10.7%, with manufacturing down 12.2% and mining down 10.5%. Utility output is basically unchanged on a year-over-year basis, down only 0.1%.
Having two back-to-back gains in industrial production is highly significant, and constitutes definitive proof, in my opinion, that the recession is over.
Breaking the release down further, production of finished products increased 1.1% on the month following a gain of 0.9% in July, but is down 7.3% from a year ago. Output of finished consumer goods rose 1.3% following a 0.8% gain in July, but are down 4.1% year over year. Output of business equipment rose 0.6% following a 1.1% gain in July, but is working its way out of a 14.7% year-over-year hole. Output of materials rose 0.6% following a 1.3% gain last month, but is down 13.0% year over year.
In other words, industrial production is still very depressed, but is starting to come back. That is a classic sign of a recession being over.
The other part of the report, on Capacity Utilization (CU), provides even more definitive proof. Look at the chart below (from http://www.calculatedriskblog.com/). It shows that a bottom in capacity utilization is always seen at the end of a recession.
If you need a single indicator for the end of recessions, historically, this is it. Not only does it always turn at the bottom, but when in recession, it almost never turns up unless the recession is ending. Actually, if you had to pin me down, I would go one step further and say that manufacturing capacity utilization is the best indicator, rather than total utilization since the Utility part of total utilization is as much a function of the weather as it is of the economy.
In August, total CU rose to 69.6% from 69.0% in July (revised from 68.5%). That is two back-to-back increases since it set a record low (data back to 1967) in June of 68.3% (revised from 68.1%).
To be sure, the absolute levels of utilization are still awful. Just keep the following rules of thumb in mind:
Any CU over 85% constitutes an economic boom, and raises the possibility that the economy is going to overheat, causing inflation to spike. CU of 80% is a normal, healthy economy. CU of 75% is a recession.
Prior to this downturn, we had never fallen below 70% (unfortunately, the data does not exist for the 40’s or 50’s, let alone during the Depression, it is possible that we briefly fell below 70% in the 1947 downturn, as the economy was demobilizing from WWII). Since 1972, the average total CU is 80.9%, and 79.6% for manufacturing, 87.6% for mines and 86.8% for utilities.
Thus we are in a situation where the level is bad, but the direction is good. The end of a recession means you are at the point of maximum economic pain — not that everything is hunky dory all of a sudden, just that the process of mending is starting.
CU for manufacturing rose to 66.6% from 66.1% in July (revised from 65.4%) and 65.1% in June (revised from 64.7%, record low). Mine utilization rose to 82.2% from 81.7% in July and 81.1% in June. Utility utilization rose to 79.7% from 77.3% in July and 78.7% in June.
Over the last year, Utilities have added 1.8% more capacity. By contrast, our capacity has actually declined by 0.7% in manufacturing and by 0.1% at our mines. At current levels of CU, 12.6 points below the long-term average, in manufacturing, there is little need for businesses to invest in more capacity.
This does not bode well for capital equipment oriented firms like Parker Hannifin or Honeywell (HON), however with the rise they might be seeing some faint light at the end of the tunnel. Mining is a lot closer to normal levels of utilization (5.4 below average), so mining equipment firms like Joy Global (JOYG) and Terex (TEX) are much closer to seeing an upturn in domestic orders.
The economy is clearly in a deep, deep hole. We have, however, stopped digging it deeper and are starting the processes of climbing out. I don’t think it is going to be a quick recovery, and the part of the downturn that most directly touches people’s lives — unemployment — will be one of the last things to turn.
Notice on the graph that the recovery in CU after the last two recessions was much more gradual than it was in earlier recessions. This mirrors the prolonged “jobless recoveries” we had following those downturns. I suspect the same thing will happen this time around.
Note that we never fully recovered in terms of CU during the last economic expansion, and that the peak was not that much higher than the worst we saw during the 1990 recession. Still, it is nice to be headed in the right direction.
Read the full analyst report on “HON”
Read the full analyst report on “JOYG”
Read the full analyst report on “TEX”
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