Industrial Production: Those Ugly Annual Benchmark Revisions And The Heightened Risk Of Recession

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Includes: AIRR, FIDU, FXR, IYJ, RGI, RINF, SIJ, UXI, VIS, XLI
by: Doug Short

By Doug Short

The big economic news on Friday was the Department of Labor's Employment Report for March. The mainstream press focused on two numbers: the 215K new jobs and the 5% unemployment rate. Over the next few days we'll dig in a bit deeper to look at some of the underlying employment demographics, which in many ways give a deeper understanding of employment conditions. But the much more significant economic news on Friday was the Federal Reserve's noon release of the disturbingly negative annual benchmark revisions to Industrial Production.

Industrial Production is one of the Big Four economic indicators we report on every month, along with Nonfarm Employment, Real Retail Sales and Real Personal Income (excluding Transfer Receipts). Industrial Production has been the weakest link, by far, in the economic recovery from the Great Recession. On Friday we learned that IP is even weaker than we thought. Here is a snapshot of the annual benchmark revisions with an overlay of the pre-revision data since 2007, which gives us a sense of pre-recession trend, the contraction, and the subsequent recovery for this key metric.

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At this point in time, the post-recession recovery peak for this indicator occurred in November of 2014. The latest index level is 2.34% off that late 2014 peak and at a level below its pre-recession peak. We're currently about where we were in February of 2007.

Here is a look at the year-over-year percent change in this indicator since 1950, updated with the latest annual benchmark revisions. We are now at a level lower that at the onset of all ten recessions over this timeframe.

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If we study the chart above more closely, we see that the latest YoY level is fractionally off the interim low of -2.3% set two months earlier in December. This index has never been at that -2.3% level outside the context of a recession.

Here is an updated snapshot of the Big Four indicators we routinely track illustrating percent off their all-time highs for the average of the four since before the last recession.

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This collective overview of Big Four hit its interim peak in November of 2014 and is now at the pre-Great Recession level similar to where it was in late 2005 ... over ten years ago.

Does the Fed's set of annual Industrial Production benchmark revisions signal a heightened risk of a near-term recession? Optimists will no doubt dismiss the question and point out the fact that we live in post-industrial economy in which this indicator is of diminished importance. As we post this commentary, the most recent month confirmed by the National Bureau of Economic Research as an ongoing expansion in the business cycle is August of 2014. That's three months before the November 2014 peak in both the newly revised Industrial Production index and the average of the Big Four economic indicators that the NBER closely follows.

The annual benchmark IP revisions announced by the Federal Reserve on Friday were certainly known to Fed Chair Janet Yellen in advance of her speech on The Outlook, Uncertainty, and Monetary Policy to the Economic Club of New York. We now have a better understanding of why her tone was so conspicuously dovish.