The Fed reported on Friday that Industrial Production rose by 0.7% in February on a seasonally adjusted basis. January’s data was revised up from a decline of 0.1% to a gain of 0.1%. The consensus estimate was for an increase of 0.4%. This is another in a series of instances going back to last September where economists have underestimated the strength of the economy.
The actual, not seasonally adjusted number rose by 0.6% month to month and was up 2.7% year to year, which was slightly stronger than the January year to year gain of 2.5%. Month to month changes in February have varied over the past 10 years. There’s no seasonal pattern evident. In 2012 February was up 0.4% and in 2011 it was down 0.8%. The average February change over the past 10 years was a gain of 0.4%. This year’s gain was better than average.
The “good news” must be kept in perspective however. Industrial production levels remain below 2007 and even early 2008 levels. US population has grown by 5% since then, and the Fed has pumped trillions into the financial system, and US industry is producing less now than it did 6 years ago.
Stock prices are nearing the peak level they reached relative to industrial projection in 2007. As the Fed continues QE I would expect both to move more or less together. There’s no guarantee that the ratio will stop rising at 15.5 like it did in 2007, however. At that time the Fed had stopped growing the SOMA, which it had grown 5% annually since 2002. In the second half of 2007, the Fed actually began withdrawing funds from SOMA to pay for the TAF and other emergence alphabet soup programs that it cooked up in 2008.
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By shrinking the SOMA in 2007 and 2008, the Fed starved the Primary Dealers of the cash they needed to keep the game going, and both the stock market and economy crashed. The situation is exactly the opposite this year as the Fed adds a net of $85 billion a month to SOMA through gross purchases from Primary Dealers of $115-130 billion per month In 2007 when this indicator was peaking along with the stock market, the Fed had already pulled the plug on growing the SOMA. That’s what ended the bull market, not the fact that stocks were extended. I would expect something similar to end this bull move. But this is likely to continue for as long as the Fed perceives that there’s no threat from inflation, and at the same time the unemployment rate stays sticky above the Fed’s 6.5% target.
This report is excerpted from the permanent charts page on Industrial Production and Electric Power Generation.
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