Whither The Shallow Industrial Recession?

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by: Hale Stewart

I have written several times in the last month that it looked like the "shallow industrial recession" I have been describing for the past year bottomed in March. That might still be true, but the bad news is, Industrial Production this morning certainly didn't help the cause. April was revised from +0.7% to +0.6%, and May came in at -0.4%:

The bad news is, manufacturing was a big part of that decline, and the last new high was in January. The silver lining is, mining (commodities) has been the epicenter of the shallow recession, and that ticked higher - for only the third time in 18 months:

As the below graph shows, the second derivative - the change in the YoY% decline in mining - is improving:

This suggests that the commodity production collapse that has driven the recession is now ending or is likely to end sometime later this year.

Another marker for the end of a recession, especially a deflationary one, is that the YoY% decline in industrial commodities reaches its maximum. This has been true for 100 years. Well, commodity prices in the PPI increased in May, and it looks very likely that the YoY% change in commodity prices was at its worst at the end of last year:

Yet another marker is an improvement in the ISM manufacturing new orders index above 50. The pattern is:

  • First, new orders turn
  • Second, business sales turn
  • Finally, business inventories turn

Here is the graph of new orders (green, left scale) compared with sales (blue) and inventories (red) for the last 20 years:

ISM new orders has been positive for 5 months, strongly so for the last 3. In April, as reported yesterday, sales turned positive. Meanwhile, inventories at both the manufacturing and retail levels declined. As a result, the business inventory-to-sales ratio declined:

All of these things tend to happen as we exit a recession.

Finally, although it is just one more factotum, new orders in the Empire State Index turned sharply positive in this morning's report for June, up to +10.9, tying its best level since 2014.

So, while May industrial production was an unwelcome negative, there continue to be more and more signs that the shallow industrial recession is ending, and there is still a reasonable chance that it has already bottomed in March.

New Deal Democrat, XE.com