The US Industrial economy continued its advance out of recession last week (If pipeline scheduling is correct), though again at a somewhat slower pace than recent weeks.The Production Index (In terms of its 28-day moving average of gas-flow scheduling into US industrial facilities) advanced for its 11th week in a row (since its May 28th bottom), and has now recovered better than 50% of it's recession-suggested deficit. In its dailies (as evidenced by the "Part 7" industrial daily posts on the IV-CWEI site) it was actually a second softer week, as opposed to the first two red-hot weeks of the featured 28-day average. Within this weekend's scheduling, early strength also gave way to softening mid and late week.
On a sector-by-sector basis (see part "8" posts on the IV-CWEI site) the steel sector (which led the other groups to the downside with a 75% drop in scheduling) continues to lead on the upside and has more than doubled since its worst month ever (June). The auto sector (which also showed a nice pop for the 1st day of August) continued to back-peddle, in spite of the much talked of "Cash for clunkers" activity. Michigan (Robrys home state) remains out of the recession-recovery game.
The Paperboard-based Consumption Index also pulled off just a bit more from its all-time high four weeks ago, though still well above year-ago levels. In its dailies, the softening trend reversed sharply as the week ended.
California continues to strengthen big-time, perhaps due to the recent fall in the US dollar taking out imports. PG&E alone reported just today industrial natgas deliveries hit an estimated 1 BCF for the latest day, the first time that has happened since early October '08. A bit more of a pull-back in the dollar might accomplish the same for the interior states, igniting local industrial production at the expense of imports.
Theoretically, there has to be some point of equilibrium, where lowered exchange rates make imports less economical... to the point that trade balances out as higher-cost shuttered US industry gains advantage over importers and displaces them... pushing up inflation in the process. One could make a point that a strong dollar masks real inflation, and that the re-emergence of inflation is the cost of economic recovery. One could also ask the question, does the Federal Reserve hike interest rates to control inflation, or to hide it.
Eventually (if not now) the world is not going to permit such huge US trade deficits/imbalances. If that time is now, it might be a terrible time to be invested in transportation (Trucks & Rails). Those huge California imports keep a lot of folks busy moving freight thousands of miles to distribution hubs across the US. If local higher-cost industrial production ignites (shutting off import transport), it could be rough for transportation investments.
I remain leery (based upon Automotive gas-flow scheduling) that the Consumption index is somewhat overestimating the gains in consumption. One handicap of the Consumption Index is (because it is derived from gas-flows into cardboard-box manufacturing) is it doesn't touch merchandise that isn't packed in cardboard boxes (like Automobiles). So with gas-flows suggesting softness in the Auto-Sector (Which the model does not represent) and strength in non-auto (Which the model does represent) the non-auto strength gets imputed into the whole of US consumption by the model.
Now this is not to say that the US economy isn't advancing (the gas-flows evidence numerous signs of a rapid ramp in the economy). It is, however, to say that the Consumption Index (and the Inventory Index that makes use of it) look too fast on the consumption ramp-up. (It is also to say that Robry's models need improvement!)
The Inventory Index (given the Consumption & Production Indexes) has now given up all of its overhang, and is extending its deficit to year-ago levels... reflecting perhaps the long-term damage done to some industries (especially auto) by the length and severity of the recession, and the ineptitude of the government/feds to address it.
Overall, I continue to believe the industrial-recession ended at the May-28th Production-Index bottom, and anticipate a turning in the employment numbers in the month(s) ahead. With the implied inventory overhang now gone, and production lagging consumption by a wide margin, I believe the recovery has (to borrow a term from nuclear physics) reached its point of critical mass. As long as consumption holds at current levels, production should ramp up to meet it.
That is not to say that the economy is free of risk. There is always the risk of news events (acts of war/terrorism, natural catastrophes, political events/blunders, etc) that could cause consumers to panic, leading to a "double-dip" type recession. Momentum, however, appears (at least for the time being) on the side of recovery, and until that momentum gets broken, I see the recovery continuing.
-Robry825
