Broad Gains in Industrial Production Strengthen a Positive Outlook
Industrial production jumped 1.0 percent in April, the largest monthly gain since February 2014. Over the past year, industrial production is up 2.2 percent, the best growth since the year ending in January 2015. Those gains helped push capacity utilization up 0.6 percentage points to 76.7, the highest since August 2015.
Gains in industrial production were broad-based. Manufacturing accounts for about 75 percent of total industrial production and posted a 1.0 percent increase in the month. Within manufacturing, durable-goods production and nondurable-goods production both rose 1.0 percent. Leading the durable-goods production were a 5.0 percent surge in motor vehicle production, a 1.8 percent increase in computers and electronic products, a 1.8 percent gain in miscellaneous durables, and a 0.9 percent increase in machinery. Among nondurable-goods producers, petroleum- and coal-products production rose 2.5 percent, while food, beverages, and tobacco rose 1.6 percent and textile mill products gained 1.4 percent.
Measured by market segment, consumer-goods production — about 28 percent of total production — rose 1.5 percent in April, with consumer durables up 3.0 percent and consumer nondurables up 1.1 percent. The longer-term trend of stronger performance of consumer durable-goods production relative to consumer nondurables continues. Consumer-durables production is trending higher and is closing in on prerecession highs while consumer-nondurables production is trending essentially flat, about 10 percent below prerecession levels.
Business equipment — about 10 percent of production — has been trending flat over the past few years but is starting to turn decisively higher. The better performance is consistent with the AIER Leaders index and the stronger gains in the indicator within the Leaders index for real new orders for nondefense capital goods excluding aircraft. Defense capital-goods production continues in a mild downtrend.
Non-industrial supplies — about 15 percent of production — is being pushed higher by production of construction supplies. This is consistent with improving trends in residential construction as well as gains in nonresidential construction.
Material production — about 46 percent of output — rose 0.8 percent for the month and is up 2.8 percent from a year ago. The energy component has been a major source of volatility in this category particularly following the collapse of energy prices in mid-2014. The non-energy component has been turning higher in recent months as overall production picks up.
Today’s report from the Federal Reserve shows a few positive trends developing in the U.S. economy as well as support for several already-existing favorable trends. The virtuous cycle between jobs and income growth boosting consumption and investment appears to be gaining momentum. This is further confirmed by the strong performance of the AIER Leaders index, which remains well into positive territory.
Though the current expansion is old by historical measures, few significant imbalances are threatening the expansion. The greatest risks are from the Fed, which is on a slow track toward policy normalization and seems unlikely to derail the expansion in the short term; Congress and the Trump administration, which are generating far more news headlines and uncertainty than any substantial policy initiatives; and geopolitical developments, which are nearly impossible to anticipate. The most likely course for the economy is continued economic growth, but with the expansion approaching its eighth birthday, very careful monitoring for potential risks such as major policy changes, financial excesses, or unsustainable activities is essential.
Robert Hughes
Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
