Industrial Production – July 2009

Bottom Line

Industrial production rose by 0.5% in July, with manufacturing bouncing up by 1.0% – the first major jump in manufacturing output since the end of 2006.

Motor vehicle output sped out of the pit stop at a rate of 20.1%, mainly due to bankruptcy-related shutdowns in the prior months of May and June.

Excluding the volatile motor vehicle industry, manufacturing output moved up by a slight 0.2%.

Utilities output collapsed by 2.4% due to temperate weather and relatively low levels for industrial power demand, despite the jump in manufacturing output.

Manufacturing capacity utilization moved up to 65.4% – output has a long way to go to climb out of this deep hole.

Outlook

Manufacturing output jumped by 1.0% in July, the first major advance in output since the end of 2006. The sharp gain in manufacturing output, however, was driven primarily by bankruptcy-related distortions to timing of auto industry shutdowns and model changeovers. As a result of these distortions, motor vehicle output sped out of a May-June pit stop at a rate of 20.1%,

Excluding motor vehicles, manufacturing output advanced by a scant 0.2%, with variable performance across industries, with computer output up 0.6%, but machinery output down by 0.5%.

The recent up-scaled funding of the “cash for clunkers” program will continue to provide momentum for the auto industry through the third quarter. In addition, recent gains in export orders are starting to translate into higher export shipments and production in key capital goods industries.

What we are seeing here is the initial fragile blossoms of the recovery. However, the auto industry will burn through the remaining funding of the “cash for clunkers” program very quickly, and other fiscal stimulus measures – the first-time homebuyers credit in particular, will expire before the end of the year.

Despite the strong likelihood that output will expand at a good rate in the third quarter, a sustainable recovery is by no means secured. In fact, a slowdown in growth in the final quarter of 2009 seems inevitable, which raises risks for the outlook in early 2010.

While we should celebrate what appears to be an end to a long decline in industrial output, it is far too early to pop the champagne and declare a decisive victory from the snares of the recession.