The headline number on Industrial Production “missed” today, coming in at a seasonally adjusted gain of 0.2% versus the economic consensus guess of 0.4%. But is that accurate and does it matter?
The Fed’s actual, not seasonally adjusted (NSA) Industrial Production Index was up 2.8% in June versus May. That’s a completely average performance for June, which is always an up month and had a similar gain in June in each of the past 10 years. The average gain was +2.9% over the past 10 years and the index was up 3% in June 2013. This is based on units of production and thus is a measure of “real” performance, not skewed by inflation.
The year over year gain was 4.1%. This is near the center of the range of annual rates of change over the past 3 years. I’ll let others argue whether 4% is “good” or “bad.” I’ll just note that it has been an amazingly consistent performance, ignoring the vagaries of the Fed’s stop/start pumping of money into the financial markets via periods of QE interspersed with no QE. The growth rate has been about the same under QE3-4 as it was in 2011, when there was no QE. Today’s growth rate is lower than in June-November 2011, when there was also no QE. The evidence does not support the Fed’s contention that money pumping and ZIRP stimulate economic growth.
But as I have opined with regard to other economic data, not only does this appear to be as good as it gets, there are aspects of what appear to be a dangerously extended condition on this chart.
The industrial production index is based on units of production and therefore need not be adjusted for inflation. As I have shown in a prior analysis, the gains have been skewed by energy production. If those components are removed, net industrial production ex energy remains below 2007 peak levels.
Ex-energy industrial production rose just 2.6% over the past 12 months. The growth rate has been declining since 2010 in spite of all the Fed’s money pumping… Or because of it because it encourages financial engineering at the expense of real investment. And as we see in this chart there’s been a surge this year that looks exactly like the surge in the first half of 2007.
I’ve asked before, “Can the energy boom be sustained at this pace?” Maybe this chart holds clues to the answer.
And the next question is, “What happens to the US economy when this begins to moderate?”
Industrial producers apparently take their cues from the stock market, which in turn has been directly driven by Fed cash over at least the past 12 years.The Fed pumped up the system at a steady pace throughout the 2003-06 period, growing its balance sheet at a 5% clip throughout the period. That’s hard to see on the chart because the subsequent balance sheet expansion has been so extreme. But in 2007, the Fed pulled the plug and stopped growing its assets just as the massive, easy money driven, generational credit bubble had begun to enter its chaotic deflation phase.
The Fed is currently moving gradually to end its historic rates of money pumping inflating the current massive bubble. That pumping will slow to a crawl at the end of this year with only MBS replacement purchases continuing at a low background level in 2015 after the Fed ends outright Treasury and MBS purchases. Whether that will be sufficient to keep the current asset bubble driven industrial production surge from another chaotic collapse is the biggest question.
I suspect that those who fear that the Fed can never end QE, at least for more than a few months may prove correct. That has terrible implications for the future. The markets themselves will send timely clues as to how that will manifest itself. It’s up to us to pay attention for those clues.
