Last week we reviewed US industrial production (IP) and saw that it has been contracting for more than a year. The IP indexes represent the production of factories, mines, and utilities in unit volume, not dollar sales, both by total output and output by industry. While these indexes do not represent service industries directly, they do indirectly because electric power production and distribution feeds service business.
The IP indexes give us a pretty good idea of how the US economy is performing overall and by industry. Let’s just say it’s not the picture of health. The industrial production data includes breakdowns by industry and sector which can tell us a great deal more about the state of the US economy. It’s worse than the headline writers would have you believe. I promised in the report last week to illustrate some of that data for you.
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One of the divisions of IP is an energy index and a non energy index. We all know that there was a tremendous oil and gas production boom from 2009 to 2014. The last couple of years of that were a bubble. Prices kept rising in spite of the fact that supply was persistently outpacing demand. The traders in the futures markets ignored the physical market fundamentals and continued driving prices higher. Big money saw oil as a money substitute, and the big money bought the futures as a hedge against central bank money printing.
Prices kept rising and producers kept producing. That helped US industrial production to grow very strongly in the first 2 years of the “recovery” from the 2009 recession low, then at a slower pace until 2014 when IP peaked.
Here’s what has happened since then and what it tells us about the future.
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