Note from dshort: This commentary has been updated with this morning's release of the November Industrial Production Report.
Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
- Industrial Production
- Real Personal Income (excluding Transfer Receipts)
- Nonfarm Employment
- Real Retail Sales
The Latest Indicator Data
According to the Federal Reserve, "Industrial production increased 1.3 percent in November after edging up in October; output is now reported to have risen at a faster pace over the period from June through October than previously published. In November, manufacturing output increased 1.1 percent, with widespread gains among industries. The rise in factory output was well above its average monthly pace of 0.3 percent over the previous five months and was its largest gain since February." The full report is available here.
Today's month-over-month increase of 1.26 percent (to two decimal places) came in well above the Investing.com consensus of 0.7 percent.
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As I've mentioned before, my personal view is that Industrial Production is the least useful of the Big Four economic indicators. It's a hodge-podge of underlying index components and subject to major revisions, which undercuts its value as a near-term indicator of economic health. As a long-term indicator, it needs two key adjustments to have any correlation with economic reality. First, it should be adjusted for inflation using some sort of deflator relevant to production. Second, it should be population-adjusted.
The chart below is my preferred way to look at Industrial Production over the long haul. I've used the Producer Price Index for All Commodities as the deflator and Census Bureau's mid-month population estimates to adjust for population growth. I've indexed the adjusted series so that 2007=100.
The most recent data point in this adjusted series is a new interim high following the Great Recessions.
Note: I'm indebted to Bob Bronson of Bronson Capital Research for instructing me on the necessity of inflation and population adjustments to decipher of the Federal Reserve's otherwise misleading Industrial Production data.
The Generic Big Four
The chart and table below illustrate the performance of the generic Big Four with an overlay of a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009. We now have the three indicator updates for the 61th month following the recession. The Big Four Average is (gray line below).
Current Assessment and Outlook
The overall picture of the U.S. economy had been one of slow recovery from the Great Recession with a clearly documented contraction during the winter, as reflected in Q1 GDP. Data for Q2 supported the consensus view that severe winter weather was responsible for the Q1 contraction — that it was not the beginnings of a business cycle decline. However, the average of these indicators in recent months suggests that, despite the Q2 rebound in GDP, the economy remains near stall speed.
The next update of the Big Four be the Real Retail Sales on Wednesday, following the release of the November Consumer Price Index.
