More on Industrial Production

By Spencer,

Earlier I showed how the sharp drop in industrial production compared to other cycles, but did not point out that the factory operating rate moved down 1.7 percentage points, to 68.0 percent, the lowest rate of utilization since this series began in 1948.

Normally, capacity utilization leads inflation and this implies we
should see more disinflation or even deflation.

One other thing you can do with the industrial production data is combine it with the hours worked data released in the BLS employment report to generate a rough estimate of monthly manufacturing productivity. This calculation implies that the sharp drop in manufacturing productivity late last year is continuing and that the originally reported drop in fourth quarter manufacturing productivity should be revised down.

The falling productivity is reflected in the Conference Board’s estimate of Manufacturing Unit Labor Cost included in the Lagging Index. It shows that manufacturing unit labor cost is rising at almost a 10% rate while the PPI for Finished Goods is 1% below its year ago level.

This combination of rising unit labor cost and falling PPI generates the largest spread on record between these two variables. But this spread is the dominant factor driving manufacturing profit margins and together with falling output implies that manufacturing profits are under severe downward pressure. So it is not just financial write offs that are causing estimates of S&P 500 earnings to be revised down sharply and firms are implementing widespread layoffs to bring costs and prices back into line and restore profit margins.

This severe pressure on profits implies that the economic bottom is not on the immediate horizon.