In September, total Industrial Production rose by 0.7% from August — its third straight monthly increase after a string where it was down 17 of 18 months. Total Capacity Utilization also climbed to 70.5%, up from an upwardly revised 69.9% (originally 69.6%) in August. While both are still at extremely low levels, the three straight months of improvement is a VERY good sign.
Turning first the the Industrial Production numbers, the increase in total production was 0.7%, which is a distinct slowdown from the 1.2% gain in August, and from the 0.9% gain in July. However, the August number was revised up sharply from 0.8% growth originally reported (July was revised down from up 1.0%). Thus the gain was coming against a higher base than was thought, and things were better in August than we thought.
Still, from a longer term perspective it is not all that good — year-over-year total Industrial Production is down 6.1%. The most important part of industrial production is manufacturing production. It posted a 0.9% gain, following a 1.2% (revised from 0.6%) increase in August and a 1.2% rise in July (revised from 1.4%). On a year-over-year basis, it is down 7.7%.
Mine output was not hit as hard as manufacturing output, but it too is starting to increase, rising 0.7% in September after gains of 1.1% and 1.2% in August and July, respectively. It is actually up a slight 0.2% from a year ago. Utility output, which can be affected by the weather as much as by the state of the economy, fell 0.7% — partially reversing the big 1.9% increase last month. In July, Utility output fell 1.5%. Relative to a year ago, it is down 2.1%.
Production of materials was up 0.8% following back-to-back increases of 1.3%, but is still down 6.1% from last year. Total output of finished goods increased 0.9% following increases of 1.4% and 0.8%, but is down 3.9% from a year ago. Finished goods output is composed of both consumer goods and business equipment. Output of consumer goods is doing better than that of business equipment.
Production of consumer goods rose 1.1% in September following gains of 1.6% in August and 0.6% in July. It has nearly recovered in year-over-year terms, down just 1.7%. Output of business equipment, on the other hand, rose just 0.1% — a sharp slowdown from gains of 1.1% in August and 1.0% in July. Since last year, output is down 8.0%
Part of the reason for the lackluster increases in business equipment output can be found in the capacity utilization numbers. Here is the general rule of thumb on capacity utilization, which can be seen in the graph below (from http://www.calculatedriskblog.com/): if capacity utilization (particularly in manufacturing, utility utilization can be flakey due to weather) is above 85%, the country is in an economic boom, and is in danger of overheating, and the Fed should consider tightening up to prevent an outbreak of inflation. Around 80% is the sweet spot and signifies the economy is healthy. Historically (the data only goes back to 1967, unfortunately), 75% represents a deep recession.
Capacity utilization rates below 70% have only been seen in the current downturn. The rise back above the 70% level to 70.5% is a very welcome sign, and the historic low of 68.3% set in June was trurely horriffic. However, it emphasizes just how far we have to go to get back to something resembling economic health.
Not only did capacity utilization rise in September, but the August number was revised up to 69.9% from 69.6%. As with Industrial Production, manufacturing is the most important part of capacity utilization to watch. It rose to 67.5% in September from 66.8% in August (originally 66.6%) and 66.0% (was 66.0%) in July.
Its record low was hit in June, at 65.1%. Just think about that for a minute: over one-third of our manufacturing capacity was sitting idle — one out of three plants shut down. While the patient is showing signs of getting better, he is still one very sick puppy.
Capacity utilization in mining rose to 83.6% from 82.9% in August and 81.9% in July. Normally, mining utilization runs higher than manufacturing utilization. The long-run average mining utilization is 87.6%, versus 79.6% for manufacturing. Thus, miners such as Freeport McMoRan (FCX) are still depressed, even if they are faring better than are manufacturing firms. Utility utilization fell to 78.1% from 78.7% in August, but remains above the 77.4% level in July.
The numbers are some what distorted since total capacity in utilities has grown by 1.8% over the last year, while it is down (i.e permament closures of facilities) 0.9% in manufacturing and down 0.4% for mines. Like mines and factories, utility utilization is still well below its long-term average level of 86.8%.
By stage of processing, we are doing better at the base of production, with utilization of crude goods (sort of reflects more mine output than factory output) at 82.6%, up from 81.4% in Auguast and 80.3% in July. Semitfinsihed utilization rose to 67.3% from 67.0% in August and 66.3% in July. The utilization of factories making finished goods rose to 69.3% from 68.6% in August and 67.5% in July.
Much of the increase in output (and utilization) comes from the Auto industry, where production rose 7.4% in September after gains averageing 11.0% in August and July. The increase in output at firms like Ford (F) and its suppliers like Eaton (ETN) and TRW Automotive (TRW) was clearly tied to the Cash for Clunkers program. Now that the program is over, and the depleted inventories have been rebuilt, the big question is: can it continue? If it does in October and November, it will be a very good sign for the economy.
Overall, this is an encouraging report. We are headed in the right direction, but we still have a very long way to go.
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