Several of the June updates on the economy to date have brought discouraging news (retail sales, the ISM Manufacturing Index, and payrolls). Today's report on industrial production offers a refreshing change for the better. The Federal Reserve advises that industrial production rose 0.4% last month, a respectable rebound from May's 0.2% decline. Even better, the year-over-year change through June perked up slightly to 4.7% vs. 4.4% through May. Is the moderately better news for industrial production enough to blow away the worries dispatched by less-encouraging news from elsewhere in the economy? No, but it's enough to keep the debate open about what happens next.
Nonetheless, reviewing the last several months reminds that industrial production activity has turned choppy lately. The June report, which is subject to revision, is certainly welcome after May's slump. But it's unclear if the economy has hit a temporary rough patch, or if there are more ominous clouds on the cyclical horizon.
This much, however, is obvious: the trend in industrial production, as defined by the annual pace, offers no clear sign of trouble. The 4.7% rise for June vs. the year-earlier month is near the best levels over the past 12 months. That's a healthy pace and it seems to be holding. In short, there's no sign that industrial production is rolling over and signaling an imminent recession.
Any one indicator may be misleading, of course, which is why it's crucial to look at a broad range of economic reports and their trends. On that score, the available June numbers continue to signal that recession risk is low (for an analysis for the numbers through May, see this post). That's not a forecast; rather, it's a simple but powerful profile of where we've been. What does it tell us? When the NBER gets around to dating the start of the next recession, it's looking increasingly likely that it won't be June 2012.
Beyond that, the future is wide open for debate, as always. For insight, feel free to turn to your favorite forecaster. Meantime, once we have the full spectrum of July data in hand we may discover that everything fell apart... or not. But for the moment, what we do know, based on the numbers dispensed so far, keeps hope alive, and by more than a thread.
"Manufacturing looked decent in June," opines Harm Bandholz, chief U.S. economist at UniCredit Group via Bloomberg. "The risk is from the uncertainty over the global economic outlook and, more recently, the fiscal situation in the U.S., which means companies will meet demand more and more by drawing down inventories."
If the economy is slipping over the edge, we'll soon see convincing evidence across a range of indicators. When and if that happens, I'll be among the first to report the change in the cyclical weather on these digital pages. For the moment, however, there are only cracks in the expansion's trend. It could be noise, or a sign of something deeper creeping up on us. Granted, the expansion isn't all that strong to begin with and there are plenty of threats swirling in the U.S. and abroad that could potentially derail the modest growth trajectory of late. This is no time to fall asleep at the switch for monitoring macro signals. But industrial production's resilience, backed up by some other metrics, including initial jobless claims, suggest that it's still premature to dig a grave for the business cycle.