No Green Shoots in U.S. Industrial Production

Aug. 3, 2009
The United States, along with Canada, Mexico, Europe, Japan and most of the economies of the world, is in recession, and indications are that the U.S. downturn will last until late 2009/early 2010. 
You may have heard some well-intentioned folks intone that the recovery is here; it is not. Annual U.S. Industrial Production is 7.6 percent below the year-ago level and deteriorating. Production for the month of May came in a resounding 13.4 percent below May 2008, making this the worst year-over-year comparison in more than 32 years. New Orders are in a well-defined negative trend and the consumer sector trends remain bleak. It is going to take some time for these trends to reverse direction.Leading indicators will tip us off as to when the recovery is coming, and four leading indicators prepared by different groups viewing the economy differently are signaling that the United States will move into recovery in early 2010. These leading indicators are: the U.S. Leading Indicator, the Purchasing Managers Index, Corporate Bond Prices and the M2 Money Supply. In the near term, we expect to see deceleration in the rate of recession in the second half of 2009.Don’t be fooledThere are some things we should all be watching as confirming indicators to cyclical improvement in 2010. One is Retail Sales. Look for the retail sales trend to stabilize late this year, although Christmas spending in 2009 is likely to come in below Christmas 2008. This will lead many news commentators to discuss how the recovery has fallen apart. Don’t be fooled. Expect more job losses, and in the first quarter of 2010, expect more store closings. These events are expected and will hide the recovery from undiscerning eyes.There is good news in the retail arena in that Americans are saving at a very high rate (6.9 percent in May). It is unlikely that consumers will not spend some of that cash once the recovery comes into view.We suggest that you keep a weathered eye on the Housing Starts 12/12 (annualized) rate-of-change. We need the housing industry to bottom out before a recovery can begin, and we will know it has bottomed out when the Housing Starts 12/12 starts to move higher.The downward pressure from this recession keeps on coming. The massive amounts of stimulus dollars have not stopped rising unemployment, halted the decline in house prices or kept mortgage rates from inching a bit higher. Neither has the stimulus eased credit or inspired consumers or businesses to start spending again. The debt level is ballooning and fears of a falling dollar and rampant inflation are not ill founded. As a consequence, even well run, profitable businesses have been hurt.Now is the time for all of us to assess where we each are in the business cycle and then determine when we will be transitioning from decline to recovery. The timing is important because it will impact our plans and decisions. Here are a few suggestions:• Review your marketing and advertising plans. Get ready to start spending here.• Prepare your employees for busier times by training and upgrading skills in general.• Begin to make plans to buy ahead on commodity-based inventories.• Look for bottlenecks in processes, estimating 10 percent, 20 percent and 30 percent increases in activity. Rectify any potential problems now.• Lose the losers. Focus on those products and services that will make you money if you are dealing with diminished resources and restricted budgets. There should be more good news the next time we meet.Alan Beaulieu, [email protected], is Senior Analyst, an economist and a Principal with the Institute for Trend Research, in Concord, N.H. He invites your comments. Visit and subscribe to monthly updates on EcoTrends.

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