Analysis and commentary of Industrial Production for August 2009

Bottom Line

Ø Overall industrial output rose 0.8% in August.

Ø Manufacturing output rose 0.6%, and every month from April to July was revised up. June remains the trough.

Ø Utilities output rose 1.9% on warmer, more seasonable temperatures in August.

Ø Machinery production rose 0.8%, reflecting a revival in global business equipment demand.

Ø Final demand is stabilizing, and production must rise to prevent the inventory adjustment from going too far.

Outlook

Manufacturing output is on the way up again. Production has to rise simply to prevent the inventory adjustment from going too far, since final demand is stabilizing. The trough of the recession remains in June – that is the low point for manufacturing output – but today’s report underscores that the long climb out of the hole is under way.

Motor vehicles and parts led the way again in August. Production is rebounding from exceptionally low levels, and was rising sharply even before the extra boost from “cash-for-clunkers” sales.

But vehicles are not the whole story. Five of the other ten durables categories also rose, notably machinery and electrical equipment, showing reviving business equipment demand. And five out of eight nondurables categories rose, notably food, beverages and tobacco.

With the August increases coming on top of upward revisions to previous months, it is likely that manufacturing production will grow at a 6-7% annualized rate in the third quarter, after a 9.0% decline in the second, and will do still better in the fourth quarter.