Industrial Production & the Trouble with Good News

Economics Group of Wells Fargo Bank, N.A. Summary This is not the sort of triple play you want to see. Manufacturing, utilities & mining production all fell for a second-straight month in June. This highlights the tough job for the FOMC: raise rates enough to slow the jobs market and take the swagger out of consumer spending without causing collateral damage in the industrial sector. Back-to-Back Monthly Declines Across the Board The June Industrial Production report was a gut punch. Overall output dropped 0.5%, which would have been the steepest decline of the year except that last month’s initially reported decline of 0.2% was revised lower to a drop that precisely matched June; the upshot is back-to-back monthly declines in industrial production of 0.5%. The ongoing challenge for the FOMC is to administer just enough policy tightening to slow the jobs market and increase the cost of capital enough to take the swagger out of consumer spending and thus tame inflation without causing collateral damage in the industrial sector. Today’s ugly industrial production report for June, especially in the context of the mostly upbeat retail sales release puts this challenge in stark contrast. Higher rates mean increased cost of borrowing for big-ticket durable goods. Little surprise then to see firms have scaled back consumer goods production for a second straight month. In fact, even over the past year, consumer goods production is down 0.7%. The pullback in consumer product is also evident in the trade data with real consumer goods imports down about 13% year-to-date through May. READ FULL ARTICLE >>