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Tags: Spring | Slowdown | Manufacturing | Slumps

Spring Slowdown Continues as Manufacturing Slumps

Friday, 15 June 2012 11:05 AM EDT

INDICATOR: May Industrial Production

KEY DATA: IP: Down 0.1 percent; Manufacturing: Down 0.4 percent

IN A NUTSHELL: “The spring slowdown continues as manufacturing, the broad back of the economy, is beginning to slump.”

WHAT IT MEANS: The economy has been growing with manufacturing being the brightest light.

Well, conditions are beginning to fray around the edges for this sector.

Industrial production was down in May, led by a cut back in manufacturing activity. The output declines were across the board.

There was some good news on the technology front as computers, semi-conductors and communications equipment production jumped.

There were also some gains in clothing, energy and wood products. But firms making consumer goods, business and construction supplies as well as materials reduced their activity.

And with sales moderating, the vehicle makers decided to keep inventories from getting out of hand by slowing assembly rates as well.

Manufacturing capacity utilization rates moderated but are still a lot closer to the peak hit in 2007 than the 2009 bottom.

MARKETS AND FED POLICY IMPLICATIONS: This is a disappointing report as it makes two out of the last three months that manufacturing production has declined.

This sector had been showing pretty consistent increases since mid-2009.

That said, manufacturing output soared at a nearly 10 percent pace during the first quarter. That was non-sustainable and probably excessive.

What we may be seeing is a move back toward more reasonably production increases.

Thus, whether we are in a correction or a pull back is to be seen. Adding to the uncertainty was the New York Fed’s June manufacturing index, which fell sharply. Orders, shipments and backlogs were down.

Hiring slowed as well and that is where everything seems to turn. I am a broken record on this but if businesses become cautious in their hiring because of uncertainties, they are creating a self-fulfilling prophesy.

Household spending cannot grow faster unless incomes expand and that can happen two ways: more jobs and/or higher wages. Businesses are not raising wages because they don’t have to.

If they don’t hire because they are worried about Europe or the elections, then income will not expand and the economy will falter. Of course, executives will then say they made the right decision to be cautious, but they also were a reason the slowdown occurred.

That is a trap the economy has been in for at least two years and unless it is broken, don’t expect this expansion to pick up steam.

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Friday, 15 June 2012 11:05 AM
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