Drop in Industrial Production Doesn’t Match PessimisticExpectations

Industrial Production didn’t shrink as much as analysts had forecast in June, but revisions pushed the decline in May down slightly, tempering optimism that could be read into the report.

The Federal Reserve’s monthly survey said IP fell for the eighth straight month with a 0.4% dip in June, in contrast to expectations for a 0.7% decline. The previous month’s 1.1% decline was pushed to 1.2%.

Weakness was pretty broad. Declines in durable and nondurable goods sent Manufacturing down 0.6% in the month, with production of business equipment dropping 0.8%, and consumer goods falling 0.3%. Output of Mines also fell 0.5%. 

On the plus side, Utilities rose 0.8% in the month following a 1.3% drop in May.

“The slowing in the decline of output adds to the evidence that June might eventually be dated as the recession trough,” said analysts from RDQ. 

Noting that manufacturing dropped more precipitously in the first three months of the year, RDQ said “the rate of growth of productivity in manufacturing looks to have picked up sharply in the second quarter.” They added that declines in business spending on capital equipment looks to have eased at the end of Q2 as well.

Overall, production in the second quarter fell by an annual rate of 11.6%, which is far from good, but it compares favorably to to the annual drop of 19.1% in Q1.

Jennifer Lee from BMO Capital Markets notes that Q2’s drop marks the 5th straight quarterly decline. “The longest stretch of quarterly drops is 6, a feat made in 2001, 1945 and 1930,” she noted. 

Whether this recession will match or even break that feat is, of course, not clear yet, but investors will get some idea of where the economy is heading when Fed chairman Ben Bernanke delivers the semi-annual report on monetary policy next Tuesday.

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