Industrial production fell more than expected last month, sliding 0.5% in April. That’s a bit deeper than economists projected, and it's an even bigger drop relative to the modest gain that my econometric modeling suggested. But based on today's release, it's obvious that April was a rough month for the industrial sector. The worst, in fact, since last August. The manufacturing component of industrial activity didn’t fare much better, slipping 0.4% last month. That’s the second consecutive monthly retreat for manufacturing, according to this series. It’s also the first time that manufacturing in this data set slumped for two months running since 2009.
The slowdown in industrial output is visible in other indicators, including the survey data via the ISM Manufacturing Index. But the weakness in the industrial/manufacturing slice of the economy would be all the more troubling if the labor market was exhibiting equally dark signs of stress. For the moment, that’s not the case. Jobless claims have been plumbing new five-year lows recently and the decent if unspectacular April report on private payrolls suggests that the economy will continue to post modest growth for the near term.
Nonetheless, today’s news on industrial production leaves more room for doubt about what comes next. The year-over-year percentage change in industrial activity, while still positive, dipped to +1.9% last month, a rate that shares the dubious distinction of matching January’s pace and reflecting the slowest annual gain in three years.
It’s still premature to expect the worst for the business cycle, although we’re again at the anxious stage of analysis that emphasizes each new data point as a potential smoking gun in the search for additional signs of weakness. Next up: tomorrow’s updates on housing starts and jobless claims. Thursday's consumer price inflation release is also worth watching for any signs that disinflation/deflation risk is escalating.
But before we pull the plug on optimism, keep in mind that industrial production has stumbled several times in recent years — stumbles that proved to be false alarms in terms of the big picture. It’s too early to say if that’s true again, or if we’re on the cusp of something more ominous. The truth will be out fairly soon, although the usual suspects will no doubt rush to judgment today. But until (or if) we see convincing signs of deterioration in other indicators, it’s still unclear if today’s weak industrial production report is noise or an early signal of approaching darkness. Based on my recent update on a broad review of financial and economic data, the aggregate trend still implies that modest growth will prevail (I'll have an update soon). Rest assured that when the broad trend takes a decisive turn for the worse, you’ll read about it here.
Meantime, it’s still wise to avoid the trap of letting the number du jour dictate your outlook. The economy is always in a constant state of flux, as is the projected macro trend. But this ongoing state of change is usually a gradual evolution, even if the talking heads and the latest headline would have you believe otherwise.