This recent release of the manufacturing and industrial production data added further support to our previous commentary regarding the search for the much touted economic recovery. Unfortunately, it has yet to manifest itself. The latest data showed that manufacturing in January fell back but after strong gains in December and November. However, it is important to remember that the gains at the end of 2012 were driven by the effects of Hurricane Sandy and the “Fiscal Cliff.” That ramp up in November and December is likely to leave a void in demand in the coming months – so January’s weakness is likely a return to a more normalized trend. Also, most of the production gains in the previous two months came from motor vehicles as replacements were needed post the hurricane flooding. For the month of January industrial production decreased 3.2% after a gain of 2.9% in December and rise of 5.9% in November.
Industrial production is one of the four major components of economic strength, or weakness, so the direction and trend of the industrial production data is key to our macroeconomic and investment outlook. The chart below shows the annual rate of change in industrial production going back to 1920. For the most part, when the annual rate of change in industrial production has been below zero – the economy has been in a recession. Currently, the annual rate of change is 2.1%, which is down sharply from the 7.5% rate of change seen at the peak of the economic growth cycle in 2010, clearly shows an economy that is not currently in recession. However, that could be just a function of time given the fairly steep decline that is currently in progress.
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