Tuesday, 16 of July of 2019

Economics. Explained.  

Category » Industrial Production

Durable Goods Orders

June 26, 2019

Durable goods orders fell 1.3% in May after having declined 2.7% in April after having risen 1.7% in March.   As always this is a very volatile series.  Over the course of the past year durable goods orders have fallen 2.8%. Clearly, trade is taking a toll on the manufacturing sector.  That said, our sense is that orders will grow slowly in the months ahead.

In most  months transportation orders are the biggest category contributing to that month’s change  — both to the upside and downside.  That was  the case in both April and May as transportation orders  declined 4.6% in April after having fallen 7.6% in April.  This means that orders for durables ex transportation rose 0.3% in May after having declined 0.1% in April.  These orders rose steadily at rates generally between 7.0-9.0% (red line) for most of last year, but have slipped in recent months to a year-over-year increase currently of 0.6%.  Higher tariffs are clearly taking a toll on the factory sector.

Economists are also interested in capital goods orders so we can get some sort of a handle on the investment spending portion of GDP.  But even capital goods orders can get blown around from one month to the next if there is a huge defense order or if there is a big airline order.  Orders will rise very sharply one month, only to decline almost as sharply in the subsequent month.  Thus, the focus is typically on non-defense capital goods orders ex air.  These orders rose 0.4% in May after having declined 1.6% in April.  Over the course of the past year such orders have risen 1.3%.  While currently rising at a moderate pace we look for growth to pick up somewhat as the year progresses so that we can see continued rapid growth in investment spending and positive growth in productivity.

The backlog of orders fell 0.5% in May after having declined 0.2% in April.  Basically the backlog has been flat for the past six months or so.  This means that manufacturers are filling orders at about the same pace as orders come in so that the backlog remains steady.  That also means that we should expect production to continue at a slow but steady pace for the next several months.  If orders begin to climb consistently the backlog will climb as well, which will point towards a faster pace of production going forward.

We think that the manufacturing sector is on a slow but steady uptrend.  The economy is cranking out 190 thousand jobs per month.    The tight labor market should induce firms to spend money on technology in 2019 to boost output.  The rate of capacity utilization in the manufacturing sector suggests a need fairly soon to either re-furbish the assembly line and/or invest in new technology.  Corporations are making solid profits.  Interest rates remain relatively low.  Inflation remains close to the Fed’s target.  The  underpinnings of the economy remain firm.

We expect investment spending to climb  5.7% in 2019.

Stephen Slifer


Charleston, SC

Industrial Production

June 14, 2019

Industrial production rose 0.4% in May after having fallen 0.4% in April after having risen 0.1% in March.   During the past year industrial production has risen 2.0%, but one year ago it was climbing at a 3.0% pace.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) rose 0.2% in May after having fallen 0.5% in April after having been unchanged in March.  During the past year  factory output has risen 0.7% (red line, right scale).

To a large extent factory production is being curtailed by the trade sector and the impact of tariffs on both manufacturing firms that import components used in the production process from overseas, as well as firms that export goods to other countries because of their tit-for-tat increase in tariffs.  In addition, slower production in the manufacturing sector has come from the oil and gas sector.  Over the last year oil and gas well drilling activity has fallen 4.3%. But a year ago drilling activity had risen 14.5%.  Two years ago it was growing 74.7%.  But despite the drop-off in drilling activity, crude oil output has surged in the past year.  The implication is that productivity in that sector continues to climb.

Mining (14%) output rose 0.1% in May after having jumped 2.2% in April after having fallen 0.4% in March.  Over the past year mining production has risen 10.0%.

Utilities output rose 2.1% in May after having fallen 3.1% in April after having risen 1.7% in March.  During the past year utility output has risen 0.2%.

Production of high tech equipment rose 0.4% in May after having risen 0.2% in April and 0.7% in March.  Over the past year high tech has risen 6.5%,  It is  likely that growth in this category has been hit by reduced demand for technological products from outside of the U.S. where economic activity has slowed noticeably.   Nevertheless, this series has been climbing at a respectable rate which should lead to continued  strength in nonresidential investment which will, in turn, lead to a sustained pickup in productivity.

Capacity utilization in the manufacturing sector rose 0.1% in May to 75.7% after having fallen fell 0.5% in April.  It remains somewhat below the 77.4% level that is generally regarded as effective peak capacity.  However, factory owners will soon have to spend more money on technology and re-furbishing or expanding their assembly lines to boost output.

Given that the economy remains relatively robust the manufacturing sector should tend to climb in the months ahead, but the higher tariffs are curtailing its rate of growth.  Look for little change in industrial production between now and yearend.

Stephen Slifer


Charleston, SC

Commercial and Industrial Loans

March 22, 2019

Commercial and industrial loans, which are more commonly called “business loans”  rose 8.0% in February after having risen 5.3% in January (the light green bars on the left scale).   The year-over-year growth rate has now quickened  to a 10.3% pace  (green line on the right scale).  That is the fastest four-quarter growth rate for C&I loans since the latter part of 2015.

Led by the faster rate of growth for business loans and a pickup in consumer lending, total loan growth has picked up to a  5.5% pace in the past year.  That is respectable growth without being excessive.

Stephen Slifer


Charleston, SC