Slow But (Mostly) Steady Growth For Industrial Production

by: James Picerno

Industrial production increased by 0.3% in June, in line with expectations. Although the advance was modest, last month’s rise was the highest since February, the Federal Reserve reports. The upturn was enough to boost the year-over-year gain to 2.0% through June, or slightly better than May's 1.7% annual rate. The cyclically sensitive manufacturing component also turned higher last month, gaining 0.3%, which is also the best monthly advance since February.

The overall message is that industrial output continues to grind higher. The pace of growth remains sluggish, but the good news is that there’s no obvious signs of deterioration in the broad trend. The downturn in industrial activity in April and May seems to have passed, at least for now.

But it's also true that the year-over-year rate of growth in industrial production continues to bump along near the lowest levels seen over the last two years. That’s a reminder that there’s a thin margin of comfort if another bout of weakness strikes the industrial sector. It’s debatable at what point slower year-over-year growth would signal high risk for the business cycle, but for the moment the threat looks a bit lower compared with a month ago. This much is clear: when the annual rate of industrial production is falling, on a sustained basis, we'll have a compelling warning sign from this indicator. By that standard, the numbers still look mildly positive.

Keep in mind that industrial production is likely to be relatively late as a signal that recession risk is high, which inspires the regular monitoring of a diversified data set for more timely and robust insight. The good news on this front is that a broad review of indicators continues to look encouraging for expecting modest growth, as I discussed in last month’s review of the Economic Trend & Momentum indices. By the way, I’ll publish a July update for these metrics later this week. As a preview, the preliminary numbers for ETI and EMI continue to trend positive, which is to say that the odds remain low that the economy is falling off the cyclical cliff.

That’s also the message in a markets-based look at the implied economic risk, as I noted earlier in today’s update of the Macro-Markets Risk Index. Yes, it could all come apart tomorrow. But using the numbers in hand today still paints a macro profile that leans rather convincingly on the side of growth. Granted, it’s an expansion that’s modest by historical standards, which opens the door for trouble that would otherwise be minimized with a stronger rate of recovery. That said, arguing that the economy’s slipping into cyclical darkness still requires a high dose of bearish speculation--a speculation that's unsupported by the data as currently published.