Tags: Industrial | Production | Homebuilders | Index

Data Indicate Economic Conditions Are Actually Getting Better

Wednesday, 15 August 2012 11:45 AM

INDICATOR: July Industrial Production/August Homebuilders Index

KEY DATA: Industrial Production: Up 0.6 percent; Manufacturing: Up 0.5 percent/Homebuilders Index: 37 (up 2 points)

IN A NUTSHELL: “If the economy is so weak, why is the manufacturing sector ramping up production so rapidly?”

WHAT IT MEANS: Let’s see now, consumers are cutting back, business leaders are terrified of the so-called fiscal cliff and Europe is a basket case.

What does that all mean? Why soaring industrial production, of course!

That is precisely what happened in July. We all knew that the heat wave would push up utility production, but manufacturing output rose at a robust pace for the second consecutive month and the sixth month out of the past eight. That is hardly the performance of a sector that is dependent upon demand that is supposedly weak.

Maybe things are not that bad, you think?

The details were impressive, with the vehicle, high-technology, materials and appliances sectors all posting sharp gains. Slowing things down were cutbacks in wood products, machinery, petroleum and textile products. The wood-products decline was a bit of a surprise given what is happening in the housing industry.

Conditions are improving and homebuilders are becoming even more optimistic. The National Association of Home Builders/Wells Fargo Housing Market index rose in August to its highest level since July 2007 and expectations are improving as well.

I suspect that building-supply production will be picking up as we move through the rest of the year.

MARKETS AND FED POLICY IMPLICATIONS: This was a strong report that has to be taken very seriously. While the farm sector may be hurting and that could hurt total economic growth, there is nothing anyone can do about droughts.

So, when we look at the economy, we need to focus on what can be controlled by mere mortals.

Manufacturing production does not surge if actual or expected demand is weak. So what are we to make of the continued robust expansion in the manufacturing sector? Maybe the data are underestimating the underlying strength in the economy. That is all I can think of.

Since there are the Fed’s own numbers, the members will look at them and likely conclude that growth is not faltering. That is good news for investors, but not for those on Wall Street who are begging for another round of quantitative easing so that prices can keep rising.

Of course, if the economy is doing better than perceived, that should lead to positive surprises on the earnings front, but I guess it is better to have a Fed bird in the hand than two in the profits bush. Okay, that was bad, but I am trying.

Regardless, the rising industrial production numbers, the homebuilders’ improving outlook, low consumer inflation and many of the other recent data indicate that economic conditions are actually getting better.

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Wednesday, 15 August 2012 11:45 AM
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