The State Of The Economy: Industrial Production Is Down 2.0 Percent, Year-Over-Year

by: John M. Mason

Summary

The manufacturing part of the economy continued to show decline as the figures for industrial production and capacity utilization continue to provide negative signs.

The real growth of the economy tends to parallel the performance of the manufacturing sector and these data do not give support to any pickup in economic activity this year.

It is not surprising that labor force participation, productivity, and wage levels do not show much sign of picking up given the very sluggish performance of the industrial base.

The industrial production numbers for March were down by 2.0 percent from one year ago. This is the seventh straight month that industrial production has shown year-over-year declines.

It is hard to imagine that the growth rate of real GDP will not follow these numbers, given their close relationship in the past.

On a quarterly basis, industrial production was down 1.7 percent in the first quarter from one year ago.

In the fourth quarter of 2015 industrial production was a negative 1.6 percent from one year ago.

Actually, the growth in industrial production peaked in the fourth quarter of 2014 and this was followed by declining rates of increase of 2.4 percent in the first quarter of 2015, 0.4 percent in the second quarter, and 0.1 percent in the third quarter.

The growth rate of real GDP has followed this trajectory.

Real GDP growth actually peaked in the first quarter of 2015, but then declined each quarter that followed. Economic growth was 2.9 percent in the first quarter of 2015, 2.7 percent in the second, 2.1 percent in the third, and 2.0 percent in the fourth.

Expectations are for an uptick in growth this first quarter of 2016, but, it seems hard to think that it will be increasing given the slide in the industrial production of the country.

We will get the real GDP figure for the first quarter soon.

Capacity utilization in manufacturing followed the industrial production figures. Capacity utilization dropped to 74.8 percent in March 2016. This is down from 75.3 percent in February and down from 77.3 percent in March of 2015. This is a substantial drop, year over year.

On a quarterly basis, capacity utilization was 75.3 percent in the first quarter of 2016, which represented a decline from the peak reached in this cycle of 78.6 percent in the fourth quarter of 2014, the same quarter that the growth in industrial production peaked.

Capacity utilization also declined during the year, starting out at 77.7 percent in the first quarter of 2015 and then falling to 76.6 percent in the second and third quarters, and dropping to 75.8 percent in the fourth quarter.

A crucial fact about the capacity utilization numbers is the secular decline that has taken place in this series since the 1960s when the series was constructed.

As the economy went through its peaks and valleys over the next fifty years, each peak in cyclical peak in capacity utilization was lower than the previous peak in the series.

In January 1967,the utilization of manufacturing facilities was calculated to be just under 90.0 percent of capacity. It peak before the 1973 recession was 88.7 percent and before the 1980 recession it was 86.9 percent.

It was 85.3 percent before the 1990 recession and 84.8 percent before the 2001 recession.

Capacity utilization peaked at 80.9 percent in November 2007 with the next peak, as cited above, at 78.6 percent. Capacity utilization has been declining steadily for 16 months.

Is it any wonder that economic growth is slow, that labor force participation rates are so low, and the increase in productivity is so meager? Also, why the growth in wages is so slow?

Bottom line, the US manufacturing sector doesn't appear to be growing. This should translate into an economic growth rate for the economy that is even slower than it has been.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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