Industrial Production

Industrial production was reported to have increased 0.2% in June as compared to – 0.1% declines in April and May. The entire gain was in mining and utilities as manufacturing output was unchanged.

The chart shows industrial production this cycle compared to other cycles. The old forecasting rule of thumb was that it took about a year from the bottom till industrial production surpassed its prior peak. You can see that on average this was a good rule in both mild and severe recessions. But this cycle some 19 months pass the bottom output is at 111.1 versus 120 at the peak. Despite all the talk of the rebound in manufacturing is clearly weak compared to historic norms and the thesis that manufacturing is returning to its old glory days is at best unproven.

I also calculate an estimate of monthly manufacturing productivity and according to that calculation productivity collapsed at an annual rate of -3.0% in the second quarter. The sharp drop in manfacturing productivity supports the idea that the drop in output caught firms by surprise and was due largely to supply chain disruptions after the Japanese disaster.

Even though industrial production is still about 10% below its prior peak firms are reporting that they are having trouble recruiting skilled labor. I wonder how much of the supposed shortage of skilled labor stems largely from American industry shifting its plants to places like Mississippi because the southern states have low taxes and cheap labor. If you move your plant to a low tax state firms you can save money, but there is no free lunch and you get what you pay for. If you move to Mississippi you have to draw your labor force largely from graduates of the Mississippi education system. If you want skilled labor that is able to do a little algebra and/or read a blue print, maybe you should leave your plant in states like Massachusetts or Washington where they
have higher taxes, but they also have good education systems.