Monday, February 8, 2016

Manufacturers ramping up production

Economics in a nutshell: With manufacturers ramping up production, it is clear the economy is accelerating, but it is doing so without any major inflation pressures.

Manufacturers ramping up production

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Workers put finishing touches on an Indian Roadmaster motorcycle at the end of the assembly line at the Polaris Industries factory on August 8, 2014 in Spirit Lake, Iowa. (Scott Olson / Getty Images)
Workers put finishing touches on an Indian Roadmaster motorcycle at the end of the assembly line at the Polaris Industries factory on August 8, 2014 in Spirit Lake, Iowa. (Scott Olson / Getty Images)

INDICATOR: July Industrial Production and Producer Prices

KEY DATA: IP: +0.4%; Manufacturing: +1%; PPI: +0.1%; Goods less Food and Energy: +0.2%

IN A NUTSHELL: "With manufacturers ramping up production, it is clear the economy is accelerating, but it is doing so without any major inflation pressures."

WHAT IT MEANS: Consumers may not be spending a whole lot of money but that doesn't seem to matter to manufacturers. Production surged in July and the increases were across the board. Every durable goods and five of the eight nondurable goods sectors raised output levels. On the consumer side, vehicle assemblies jumped 13% as sales remain strong. But it wasn't just what's left of Detroit. Output of electronics, appliances and furniture also increased solidly. Even clothing production was up! There were some soft spots, such as food and energy, but that doesn't change the picture. Business goods production rose as a lot more business equipment and construction supplies were churned out. The manufacturing capacity utilization rate hit its highest level since February 2008.

While production may be jumping, costs are not. The Producer Price Index rose modestly in July, helped along by a shape drop in energy costs. Services costs rose a touch faster but than goods prices but they are still not rising sharply. There appears to be only one area where wholesale costs are worrisome: Consumer foods. Finished consumer food goods jumped one percent in July and are up nearly six percent over the year. Those increases show up in the supermarket and with wages largely flat, households will have less left over after buying food to purchase other goods.

MARKETS AND FED POLICY IMPLICATIONS: Rising output and modest inflation pressures: Who could ask for anything more? The increase in production is the result of improving economic conditions and that implies hiring should continue to improve and the unemployment rate decline. Those are necessary conditions to shift the excess of supply in the labor market to an excess of demand and ultimately higher wages. With producer costs tame, inflation should also continue to be fairly modest, allowing purchasing power to rise once compensation gains pick up. The Fed members who want to keep holding the economy's hand will look at the tame inflation numbers and say that policy can remain untouched. The inflation hawks will say the industrial production gains argue that conditions are changing and the Fed needs to get out in front of any potential inflation pressures. In other words, nothing will change at the Fed. These reports, coupled with geopolitical pressures subsiding, at least a little, should put some smiles back on investors' faces.

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About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel L. at joel@naroffeconomics.com .

Joel L. Naroff
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