Economic turnaround in US has even surprised the Federal Reserve
Based on a bit of revisionist history, it now appears that industrial production turned the corner in January before gaining momentum in February.
Also with the benefit of hindsight, manufacturing output, industrial production includes manufacturing, mining and utilities, with manufacturing accounting for almost 87% of the total, rose a solid 0.3% in each of the past two months. The increase in the output of durable goods, up 0.4% in both months, was broad-based, featuring a revival in primary metals, a category that was heading one-way ' south ' for almost two years before jumping 6.4% in January and adding 1.3% to that gain last month.
Another main driver of the February increase in manufacturing output ” January and February constitute the first back-to-back gains since May/June 2000 ' was technology.
The output of computers, communications equipment and semiconductors rose 1.2% last month, following a 1.7% increase in January. Taken in conjunction with revisions to previous months, 'we now have a string of five consecutive months without a decline in high- tech,'' says Bill Sharp, an economist at JP Morgan Chase. 'The IP data for technology support we are seeing from (durable goods) orders data, the workweek and employment.''
New orders for computers and electronic products rose for four consecutive months from October through January. The manufacturing workweek for high-technology industries rose in February, and employment fell by less than it has been, says Sharp.
For computers, February marked the fifth consecutive monthly increase in output. The new news, however, was a teensy increase in the production of communications equipment, the first rise since December 2000. Of all the technology industries, telecoms suffered from the biggest glut. That production did not fall last month was something of a feat.
'The economy is really on fire,'' says Henry Willmore, senior US economist at Barclays Capital Group. 'The Fed does not believe in its own power.''
That power is the power of interest rates ' specifically short- term rates, the ones that the Fed controls. Despite all the grousing that long-term rates never fell during the cycle, the economy seems to be no worse for wear. It is the interaction between short and long rates that provides the transmission mechanism from monetary policy to the real economy.
The positive tone of today's IP report for February was underscored by the revisions to previous months.
'Manufacturing output was revised up in November, December and January,'' says Sharp.
The economy's doubters, including Federal Reserve Chairman Alan Greenspan, will say that the increased output represents a need to restock inventories, rather than a response to strong final demand.
That remains to be seen, but there is no reason to think that the aggressive monetary stimulus injected by the Fed last year ' 475 basis points ' will have a limited life, at least until the Fed decides it is time to take the punch bowl away.
The turn in the inventory cycle may be happening quickly, yet it is not likely that the levels will be restored to those appropriate for a growing economy for several quarters.
Sharp estimates that business inventories will fall at a $30bn annualised pace in the first quarter. The change from the fourth quarter's $120bn drawdown would add 3.2 percentage points to first quarter growth, according to Sharp. (It is the change in the change that matters in the calculation of inventories for GDP purposes.)
The slower pace of inventory declines Sharp anticipates in the first quarter 'doesn't take away from Q2 growth,'' he says. 'You tend to see a $60bn to $70bn annualised increase in inventories per quarter in an economy growing at trend.''
Today's data, including an increase in consumer confidence as measured by the University of Michigan survey, put economists in the untenable position of having to raise their GDP forecasts yet again.
While no one wanted to make it official just yet ' for fear of having to repeat the endeavour again in another week ' many were hinting that the 'handle'' on the growth number would be 5%.
Let's see. Real GDP growth of 5% in addition to inflation of 1% equals 6% nominal GDP.
Historically, there has been a strong tendency for the federal funds rate and nominal GDP to converge. Right now, the difference is large enough to drive a truck through. The only question is when the Federal Reserve will throw up a roadblock.
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