Today’s report on industrial production for February deals another blow to analysts who insist that the U.S. economy is in imminent danger of slipping into a recession or (even more dubious) that the business cycle has already slipped off the edge. Indeed, industrial output last month accelerated, rising 0.7% in February — the best monthly gain since November. The cyclically sensitive manufacturing slice of industrial activity also enjoyed a strong month, advancing 0.8% over January’s level. Is all this misleading us about the true nature of the trend? Perhaps, but the numbers suggest otherwise once you consider that the annual change in industrial production continues to chug along at a moderate pace, rising a bit faster at a 2.5% gain for the year through last month vs. the 2.3% year-over-year rate for January.
There’s still plenty of anxiety over how the fiscal follies in Washington will play out for the economy in the weeks and months ahead, but today’s update offers another encouraging number for arguing that moderate growth continues to dominate.
Yes, it's possible that industrial production may not be telling us all that we need to know at this point in time. That’s a reminder that it’s risky to rely on any one indicator for all your analysis on the business cycle. The good news is that today’s buoyant numbers are in line with several previous economic reports for February that also point to growth — jobless claims, retail sales and payrolls, for instance. The economic profile for February looked promising when I ran the numbers on March 4 and the broad trend looks even stronger today.
The lesson, once again, is that trying to calling major turning points in the business cycle before there's sufficient supporting data to make a convincing case is a dangerous game. Yes, there's a good case for looking ahead into the near-term future with some prudent econometric techniques to decipher what the data imply about the next month or two. This is particularly useful if you run the numbers in this way on a regular basis and evaluate how the implied forecast changes. The problem is that many analysts have a habit of making high-confidence claims about what the economy will do six months or a year out, with precious little, if any, supporting data. There's also a tendency in some circles to ignore the trend based on the data in hand, an oversight that's often linked with cherry picking the numbers and/or focusing on the last few months alone.
There are many ways to fail when it comes to analyzing the business cycle. Relatively reliable methodologies, by contrast, are a rare breed. In any case, there are no free lunches here. There's a constant tradeoff that pits reliability against timeliness. All too often, there's a tendency to favor the latter without recognizing the price tag for the former. In the end, of course, you get what you pay for. Caveat emptor!