Note from dshort: This commentary has been updated to include the February data for Industrial Production.
Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
- Industrial Production
- Real Personal Income (excluding Transfer Receipts)
- Nonfarm Employment
- Real Retail Sales
The Latest Indicator Data
Industrial Production: According to the Federal Reserve,"Industrial production increased 0.1 percent in February after decreasing 0.3 percent in January. In February, manufacturing output moved down 0.2 percent, its third consecutive monthly decline. The rates of change for the total index in January and for manufacturing in both December and January are lower than previously reported. The index for mining fell 2.5 percent in February; drops in the indexes for coal mining and for oil and gas well drilling and servicing primarily accounted for the decrease. The output of utilities jumped 7.3 percent, as especially cold temperatures drove up demand for heating. At 105.8 percent of its 2007 average, total industrial production in February was 3.5 percent above its level of a year earlier." The full report is available here.
Today's month-over-month increase of 0.09 percent (to two decimal places) follows a downwardly revised -0.38 percent in January. Today's headline number came in below the consensus expectations, which ranged from 0.2 to 0.3 percent increase.
As I've mentioned before, my personal view is that Industrial Production is the least useful of the Big Four economic indicators. It's a hodge-podge of underlying index components and subject to major revisions, which undercuts its value as a near-term indicator of economic health. Presumably the winter data this year, like last year, is skewed by unseasonably severe winter. Thus, manufacturing output, we learned today, declined for the third consecutive month. But the headline number was buoyed by a surge in utilities resulting from heating demand.
As a long-term indicator, it needs two key adjustments to have any correlation with economic reality. First, it should be adjusted for inflation using some sort of deflator relevant to production. Second, it should be population-adjusted.
Real Per-Capita Industrial Production
The chart below is my preferred way to look at Industrial Production over the long haul. I've used the Producer Price Index for All Commodities as the deflator and Census Bureau's mid-month population estimates to adjust for population growth. I've indexed the adjusted series so that 2007=100. The February index, calculated in this fashion, is 89.9 percent, about ten percent below the 2007 benchmark. Note also that 8-month disinflationary trend in the Producer Price Index has been a substantial boost to this inflation-adjusted alternate view.
The most recent data point in this adjusted series is a new interim high following the Great Recession. Note, however, that the acceleration in the adjusted indicator over the past several months is largely attributable to a disinflationary plunge in the Producer Price Index.
I'm indebted to Bob Bronson of Bronson Capital Research for instructing me on the necessity of inflation and population adjustments to decipher of the Federal Reserve's otherwise misleading Industrial Production data.
The Generic Big Four
The chart and table below illustrate the performance of the generic Big Four with an overlay of a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009. We now have three indicator updates for the 66th month following the recession. The Big Four Average is (gray line below).
Current Assessment and Outlook
The overall picture of the US economy had been one of slow recovery from the Great Recession with a clearly documented contraction during the winter of2013-2014, as reflected in last year's GDP for Q1 of last year. In April we'll get our first peak at Q1 2015 GDP. Preliminary data suggests that we'll see renewed finger pointing at the weather. The Big Four average in recent months suggests that the economy remains near stall speed.
