This morning, the Federal Reserve reported that industrial production for the month of October fell 0.1% after rising 0.7% in the prior month. The report, along with a drop in the Empire Manufacturing Survey for the month of November (from +1.5 to -2.2), points to a slight slowdown in the manufacturing sector. Such data contradict a report earlier this month from the Institute for Supply Management that showed an uptick in manufacturing activity. Our sense is that the latter snapshot may be a better reflection of the overall health of the manufacturing sector—see why below.
The primary culprit behind the October shortfall was a 1.6% decrease in mining output, which marked the first decline in that category in seven months. Temporary shutdowns of oil and gas rigs in the Gulf of Mexico in advance of Tropical Storm Karen contributed to the decline. The weak mining figure offset advances in manufacturing output, output of durable goods, and the production of nondurable goods. Given the latter advances, we believe that the overall setback is not alarming. In fact, total production in October was equal to its 2007 average and 3.2% above the year-earlier level.
Thus, even with this nominal dip in industrial production, we are not overly concerned, as other sectors of the economy are showing signs of strength, including the labor market, which added 204,000 new jobs in October. Our sense is that if more individuals are able to find work in the months ahead, spending on big-ticket items will probably pick up—and manufacturing activity is likely to reflect such thinking on the part of the consumer.
All in all, the latest industrial production data were a bit misleading and, accordingly, we are not altering our current stance that the U.S. economy will continue to press forward at a steady pace in 2014, with GDP growth in the area of 2.5%.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.