Industrial production in the U.S. unexpectedly rose in June as higher temperatures across the nation led to increased utility use.Looking at the longer term trend, the relative outperformer has actually been due to the surprise strength of the consumer (i.e. consumer goods). The area I am focusing on is business equipment, which has in fact rebounded sharply from what were massive lows. An increase in consumption going forward will likely need to come from an improved job market and investing in new equipment should be a sign that businesses view the economy in an improved light.
Factories, which led the economy out of the worst recession since the 1930s, are facing less pressure to boost production to rebuild inventories as consumer spending cools. Manufacturers will instead be able to count on gains in business investment that have spurred sales and earnings at companies such as Intel Corp.
“I don’t think the industrial sector just fell off a cliff,” Paul Ashworth, senior U.S. economist at Capital Economics Ltd. in Toronto, said before the report. “We’ve seen some pretty big gains over the last few months so I would characterize it more as giving back some of those gains. There’s still a lot to support for the industrial sector.”
Source: Federal Reserve
Business equipment is indeed showing consistent strength. But focusing on the percentage gains masks an important fact -- business equipment is only 10% of the index. So the gains there are great, but they are not enough to drive growth. The current 1% or so monthly gains in business equipment add about 0.1% gains in the whole index.
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