Industrial Production and Electric Power Generation

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First, the boilerplate on why I don’t use seasonally adjusted (SA) data.

Industrial Production

Updated May 17, 2013 Industrial Production fell by 0.5 percent in April on a seasonally adjusted basis after having increased 0.3 percent in March and 0.9 percent in February, according to the Fed.  The consensus estimate was for a decrease of 0.2%. Economists had been missing to the optimistic side on most forecasts for the past several months. This month they course corrected and now their estimates are too low.

The media only pays attention to this silliness because it has nothing better to do. I’m more interested in how the the trend of actual, not seasonally manipulated, economic data lines up with the performance of the stock market, since there is some historical correlation.

The actual, not seasonally adjusted number fell by 1.3 points month to month and was up 2.4 points year to year. That was slightly weaker than the March year to year gain of 2.9. Month to month changes in April have always been a decline over the past 10 years. In 2012 April was down 0.8 and in 2011 it was down 2.1.  The average April change over the past 10 years was a decline of 1.8. This year’s performance 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, the Fed has pumped trillions into the financial system, and US industry is producing less now than it did 6 years ago.

The Fed, Industrial Production and Stock Prices - Click to enlarge

The Fed, Industrial Production and Stock Prices  – Click to enlarge

Stock prices have broken out as industrial production has lagged.  That suggests that stocks are in a bubble. As the Fed continues QE, I would expect both to move more or less together.  If the lag in industrial production grows the bubble would increasing in size and growing more dangerous.

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  around $110 billion per month currently. There’s no reason today to expect the rally to end. That will change at some point, but all the speculation about the Fed’s next move notwithstanding, we’re not there yet.

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.  I doubt that simply slowing the pace of QE would do it.  But at some point the dangers of the bubble will become so great and so obvious that the Fed might pull the plug completely. That would probably precipitate the kind of  crash that ends all bubbles.

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Electric Power Generation and Distribution

Electric Power Generation - Click to enlarge

Electric Power Generation – Click to enlarge

I like this indicator because it is a measure that covers everything, not just manufacturing. It is a proxy for combined business and personal consumption activity. The long term view of this indicator suggests that the economy has done nothing in the past 3 years in a supposed recovery. However, there may be another explanation for the sluggishness. The year to year data shows a gain of  nearly 5% from last February. That’s a steep improvement from the 0.5% gain in December and 0.3% in November. This could be weather related as February 2012 was very warm in most of the country, and this year saw record cold in some parts of the country. Overall, the trend remains flat.

That may be due to increasingly energy efficient lighting, air conditioning and refrigeration.  The changeover to compact fluorescent lighting may be a contributing factor to keeping rates of gain below the levels of the past. For now I will view this indicator as a sign that Americans are wasting less electricity, rather than a sign of declining or stagnant economic activity. At some point the conservation trends will level out and this indicator should again do a better job of reflecting the trend of the economy. April is usually the low point of the year so it will be particularly interesting this year to see if the low comes in higher than the 2011 and 2008 lows. That would suggest that the economy is growing.

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