Industrial Production Rebounds Sharply In April

by: James Picerno

If you're looking for evidence that recession risk is rising, you won't find it in Wednesday's update on industrial production, which surged 1.1% in April-the biggest monthly rise since December 2010. The cycle may be drag us down in the months ahead, but industrial production is putting up a pretty good imitation of swimming against the tide.

The other big economic news Wednesday came from housing, which suggests that the modest mending rolls on. Housing starts rose a bit last month, although newly issued building permits retreated. The trend in both cases still looks favorable, albeit mildly. But slow healing has been the narrative all along for housing and the numbers du jour don't change that view.

Wednesday's drama, however, is clearly in industrial production, and for all the right reasons. Let's start by looking at the monthly percentage changes. As you can see, April witnessed a strong revival in this series, which is considered to be on the short list of proxies for the broad economy. The caveat is that the revisions lately have been relatively large and so today's good news may evaporate next month. But given the numbers in hand, it's a bit tougher to argue that the economy is headed for trouble.

The stronger evidence for seeing the macro glass half full comes from looking at industrial production's one-year percentage change, which moved up to a robust 5.2% increase. If and when a new recession is imminent, history suggests we'll see a much lower growth rate. To the extent that some analysts have been using industrial production's weakening annual pace of late to warn of a new slump ahead, today's stats throw a wrench into that machine.

Any one number must be taken with a grain of salt, of course. Indeed, there are still several reasons to remain cautious about the business cycle, including the slowdown in payrolls growth last month and the ongoing deceleration in the growth rate for personal income.

But today's industrial production news suggests it's still too early to give up on growth, a message we heard two weeks ago in April's IMN Manufacturing report.

This is a good time to emphasize that no one should confuse predicting a new recession at this point with making the case that a new downturn has started based on a preponderance of smoking guns in real time. There may be a downturn lurking in the near-term future, but that's still a debatable forecast, and one with slightly less statistical support in the wake of the industrial production update. Everything may change tomorrow, but in the meantime you can't rush the future. It's all a matter of how much confidence you're comfortable with when perusing the numbers. As such, the question I posed earlier in the week is still very much alive and kicking: Is That A Recession Or Just More Slow-Growth Turbulence?

Wednesday's industrial production report brings "more positive U.S. economic news pointing to continued moderate growth," Jennifer Lee, a senior economist at BOMB Capital Markets, tells Reuters.

"Things are looking brighter than they were a few months ago," opines Millan Mulraine, senior U.S. strategist at TD Securities via Bloomberg. "Auto production is doing well because consumers are buying vehicles, and consumers are buying vehicles because they feel more positive about their job prospects."

If there's a good reason to think otherwise, it'll be conspicuous in the numbers. Until then, gloom is still a forecast. It may be an informed forecast, and it may even be right. No harm done, assuming you distinguish forecasting from profiling the economy with the data as it arrives.