Industrial Production Chirps Like A Canary

April 15, 2015

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Courtesy of Lee Adler of the Wall Street Examiner

The US Industrial Production (IP) Index slowed in March to an annual growth rate of +2.0%. That was the slowest since July 2013 when the growth rate briefly dropped to +1.7%. IP is measured on the basis of units of production, so no adjustment is necessary for inflation.

On a month to month basis the actual IP index (not seasonally manipulated) dropped by less than 0.1. March is normally an up month with an average gain of +0.7 over the past 10 years. So even though the number was little changed from February, it’s a bad number. However, it’s too soon to tell if this is the beginning of the end or just a pause. If the slowdown in IP persists, the correlation on this chart suggests that it will be bad news for the stock market.

Industrial Production- Click to enlarge

The US oil and gas boom/bubble has skewed total IP upward since 2011. In spite of the crash in oil prices, production and capacity growth hasn’t slowed much yet. Production is still growing at a 12% annual rate. That’s about the same growth rate since the peak in prices in mid year last year.

Oil and Gas Capacity and Production- Click to enlarge

Where would we be without the oil/gas production boom?

Where Would We Be Without Oil and Gas Boom? Click to enlarge

A partial answer is that non-energy industrial production has only recently recovered to 2007 levels, and just barely.

Non Energy Industrial Production- Click to enlarge

Considering that the oil/gas production boom probably helped to boost not just related businesses but even unrelated industries via ripple effects, industrial production probably would not have been even this strong without the fracking revolution. While Bernanke likes to take credit for saving the world, in truth the fracking boom did more to boost the US economy. It got overdone, but it was real production with high paying jobs and widespread ripple effects throughout the US economy.

Now we must wait and see what happens to the US economy when the collapse of the oil price bubble finally begins to curtail production. If the housing bubble is any guide, it can take up to a year or so for production to collapse in reaction to the reality of the marketplace.

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