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Analysis: The current data is not all that encouraging but neither does it signal a sharp decline. It would seem that some of those endemic issues are starting to rear their ugly head and they are contributing to a slowdown in the sector sufficient to take some of the steam out of the economic recovery.
The numbers as far as industrial production do not suggest a steep decline but a stall. This is not great news but it could certainly be worse especially as some of the key sectors are still progressing pretty well. Overall manufacturing activity fell by 0.2% after scoring a slight rise in February to 0.8%. This is essentially flat. The capacity utilization numbers slipped slightly – from 78.7% to 78.6%. This is certainly not an occasion to panic but the normal level of capacity utilization is 80% and it is not encouraging that the numbers are trending ever so slightly in the wrong direction. It is when one gets into the details that one sees some continued signs of growth and encouragement.
The growth in the auto sector continues. It is not the blistering pace that was seen at the end of last year but this is not generally the time that car sales take off – even in the best of times. The growth in auto related production was 0.6% and that is on top of a 0.8% gain in the previous month. There is more to this number than meets the eye as well. The numbers last year were very impressive and some expected to see those production gains continue but that was an unrealistic assessment. The surge in production last year was not really matched by consumer demand as the majority of that growth was connected to recovering from the supply chain interruptions created by the disaster in Japan. For some months after the earthquake and tsunami, the car dealers in the US were struggling to get cars on their lots. This mostly affected the Japanese cars but it turned out that many makes and models had parts that originated in Japan. It took several months for the dealers to get their inventory back to where they wanted it and most were somewhat less concerned about sales. Now that the lots are full the sales are again key and consumers are responding slowly.
Mining and energy went up by 0.2% after a fall of 0.4% in the previous month. The fact is that energy related manufacturing will be streaky and reliant on bigger shifts in the production process. Right now the low price of natural gas has slowed development of that sector and reduced demand for equipment. The oil sector is still booming but these developments tend to follow something of a boom and bust cycle.
The part of manufacturing that is now showing some strain is that which is pointed at overseas markets. It is hard to tell whether this is a long term situation or a temporary hitch. The US remains a highly competitive exporter due to the continued weakness of the dollar and the improved export skills possessed by more US manufacturers. The problem is that many of the nations the US traditionally sells to are in trouble to one degree or another and that affects their demand for imports. The most pronounced drop in demand for US output has been in Europe and that is a region that has traditionally accounted for 25% of US export and import activity. The good news for the US is that most of that trade has been with Germany, the UK and France but the bad news is that France is in nearly as bad shape as the Italians and Spanish and the British have been struggling to stay out of recession. Only Germany has been able to maintain its usual levels of economic activity. There has also been a decline in demand from some of the Asian markets as China has slowed its economy to around 8.5%. It is not that the US sells that much to China but we sell to countries that sell to China and if there is reduced demand from the Chinese these nations reduce their demands from the US. The Latin states are also seeing some economic strain that affects their demand from the US. The only states that have not significantly reduced their imports from the US would be Mexico and Canada and that is generally good news given that these nations are almost always the top two markets for US goods.
The manufacturers in the US continue to be anchors for the recovery but in the end there have to be consumers for the goods produced. The US consumer is more active than they have been in a while but they are by no means back to their old patterns and may not be for the bulk of the year. The overseas markets are not gone but they are not as robust as they have been and that also affects output decisions for the time being.