Just How Bad Was October Industrial Production?
By Lee Adler
The Fed reported on Friday that Industrial Production declined by 0.4% in October on a seasonally adjusted basis, after rising in September by a like amount. The report said that Superstorm Sandy affected the rate of change (not the total) by 1%. The consensus estimate was for an increase of 0.1%, so it was a big miss. The Fed report blamed the storm, stating, “In October, the index for manufacturing decreased 0.9 percent; excluding storm-related effects, factory output was roughly unchanged from September.”
The actual, not seasonally adjusted (NSA) number declined by 1.4% month to month in October while remaining up by 2% versus October 2011 (see why I don’t like seasonally adjusted (SA) data). Declines are normal for October versus September. October 2011 was down 0.6% and October 2010 was down 1.4% in 2010. The average October change over the past 10 years was -0.8%. This year’s performance was worse than last year and worse than the 10 year average, and as the chart below shows, reflects a slowing in the uptrend since the 2009 bottom.
At a growth rate of 2%, this is still better than Europe and Japan, and it also runs counter to the troubles reported out of China. That’s because the US, as the Last Ponzi Game economy standing, is benefiting from all the economic turmoil around the world that results in capital flight from Europe and China. Panicked, wealthy European and Chinese individuals and institutions buy US Treasuries (or other US assets). The following week the Treasury spends that money, and that spending filters into US industrial production data.
It’s no secret that capital flows drive economic activity. As long as capital is flooding into an economy, it’s a party. The problems only become apparent when those flows dry up.
The Fed, Industrial Production and Stock Prices – Click to enlarge
Stock prices had been heading toward an overbought level relative to industrial projection in 2011, but that stopped when the Fed stopped printing money after QE2 in the second half of 2011. The ratio of the S&P 500 to the Industrial Production Index turned flat in response to the Fed holding the SOMA flat for the past year. The Fed’s QE3 MBS purchases, announced in September only began to settle last week (November 14). Those purchases will now be reflected in the green line on the chart (Fed System Open Market Account) moving up for as long as QE3 continues. I would expect industrial production to follow.
Stocks may not be expensive relative to the economic data, but they’re not cheap either. If they should run to reach the 2007 highs from here, a gain of around 10%, they would be approaching a historical extreme, but if industrial production continues to expand at the current pace or faster as QE3 cash filters through the economy, there would be room for stocks to reach new highs.
There’s no free lunch however. The cost of the money printing will show up in higher commodity prices which squeeze producers, middlemen, and retailers, and ultimately lead to disastrous unintended counter effects. We’re not there yet. The process of bubbleification may just be starting. But with that will come the unintended consequences of monetary expansion that sow the seeds of chaos.
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