Assessing Industrial Production


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Our primary takeaways are as follows:

● The latest industrial production data softened on a sequential basis, disappointing consensus expectations.

● Of the 28 subsectors that we track, 61% remain in contraction. This softening of industrial production remains indicative of the slowdown of the good economy.

● However, its impact on the top-line nominal growth conditions remains negligible. In the context of markets, our Commodities Alpha Strategy remains modestly exposed to long-commodities.

The latest data for April shows Industrial Production increased, coming in at 0.01%. This print disappointed consensus expectations of 0.1% and contributed to an acceleration in the three-month trend relative to the twelve-month trend. We show the sequential evolution of the data below:

We break this print into its contributions from production coming from Food (0.08%), Energy (-0.23%), Autos (-0.1%), and All Other Items (0.26%). Additionally, we also showcase the top 10 contributions by industry. The largest contributor this month was Residential utilities, and the largest detractor was Commercial energy products:

We zoom out to offer further context on the dynamics of industrial production. Over the last year, industrial production has contracted by -0.38%. Below, we present the top six drivers of industrial production, with the three strongest industries highlighted in blue (Converted fuel, Défense and space equipment, and Commercial energy products) and the three weakest industries highlighted in red (Foods and tobacco, Industrial and other, and Residential utilities):

Over the last few decades, the importance of food, energy, and automobiles has risen, accounting for a significant amount of the variation in industrial production. Over the last year, food, energy, and automobiles have contributed -0.15% to the -0.38% change in industrial production. We show this impact below:

To further assess the health of the current contraction of industrial production, we examine the diffusion of the 28 subsectors we track. This involves examining the number of industries that are expanding versus the number of industries that are contracting. We find that 61% of industries are contracting. Below, we visualize how a diffusion index has generally been a good barometer of the durability of upturns and downturns in industrial production:

To elaborate further, currently 11 industries are expanding and contributing 0.86% to industrial production, compared to 17 industries showing contraction and detracting -1.2% from industrial production growth compared to one year prior. We visualize their respective weighted contributions below:

Overall, a softening of industrial production remains indicative of the deacceleration of the good economy. Nonetheless, our process accounts for the fact that while business conditions may eventually lead to a self-reinforcing downturn for manufacturing, it currently isn’t in that state. Consequently, our Commodities Alpha Strategy remains modestly exposed to long commodities. Until next time.


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