U.S. Factory Production Climbs ForThird Month While Plant Utilization Reaches Seven-Month High

Industrial production is hardly overheating, but the nation's industrial plant is starting to hum again. Output rose a surprising 0.7% during September after gains of 1.2% and 0.8% during the prior two months. An uptick of a meager 0.1% had been the Consensus expectation, based on the decline in factory sector employment last month. The productivity of those still working thus soared. The recent output recovery follows a decline of 14.5% during the 21 months of recession beginning in January of 2008.

Output of consumer goods rose a firm 1.1% for the third month of increase following a 10.1% drop during the recession. Production of autos led the increase with a 7.3% rise, after two months of decline and a recession loss of 38.5%. Furniture & appliance output rose a lesser 0.3% which was the second in the last three months. Working the other way, the output of computers, video & audio equipment showed no sign of recovery, posting a 1.4% (-16.5% y/y) decline. Outside of the auto and high-tech sectors output ticked 0.3% higher (-5.3% y/y) during September for the third consecutive monthly gain. That's against the 12.8% decline during the prior 21 months.

Apparel output rose for third consecutive month of strong gain and the 2.2% increase cut the y/y decline to 11.4%. The output of business equipment rose 0.2% (-8.0% y/y) but the output of construction supplies continued 0.4% (-16.8% y/y) lower after four months of relative stability. Construction supplies output fell 23.4% during this recession.

Excess industrial capacity diminished during September for the third consecutive month. In the factory sector alone, the rise to 67.5% also was the third consecutive monthly gain but it nevertheless left the figure near its lowest of the postwar period. Across industries, utilization remained the smallest since WWII.

The industrial production data are available in Haver's USECON database.

Consumer sentiment sagged this month but retraced just half of the rise during September. The University of Michigan's mid-month October reading of consumer sentiment fell to 69.4 from a September reading of 73.5. Despite the decline sentiment remained up by roughly one-quarter from the low last Fall. Consensus expectations had been for no change this month versus September. During the last ten years, there has been a 69% correlation between the level of sentiment and the growth in real consumer spending during the next five months.

Italy’s exports and imports both dropped on the month with exports dropping faster. As a result, the trade gap widened. But the gap has improved from its worst level at end of 2008. True, the deficit has expanded again from it best level in May of 2009, but both exports and imports are on the mend. The export drop this month was particularly large and therefore it is hard to put in context; it will take several more months to figure out if this is a new trend of sorts, or an oddity.

One problem is that Germany, too, had reported a sharp and unexpected drop in exports. So the Italian drop may have something to it. Even so it could be that the same rogue factor affected both of them, it could be a coincidence, or it could be a fundamental weakening in exports. It will take time to tell

Because of the relatively sharp drop this month, -15.9% for exports Vs -8.8% for imports, the Yr/Yr trends are probably distorted. But both export and import growth are down sharply across major category components (see the table, at the bottom).

While all nations are banking on trade to become an engine of growth, US demand seems to be slow in starting and most industrialized economies are having a hard time getting into gear, too. It is in this environment in which it is hard to see why up to this point exports have responded so well in the cycle. One man’s export is another’s import and ultimately is linked to domestic demand which remains globally challenged: that is the part that is hard to figure out. Whose export demands have been strong and will they stay that way?