The Big Four Economic Indicators: June Industrial Production Rebounds

Note: This commentary has been updated to incorporate the June data for Industrial Production.

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:

  • Nonfarm Employment
  • Industrial Production
  • Real Retail Sales
  • Real Personal Income (excluding Transfer Receipts)

The Latest Indicator Data

Today's report on Industrial Production for June shows a month-over-month increase of 0.6 percent, which was better than the consensus of 0.2 percent. The previous month's 0.4 percent decline was revised upward to a 0.3 percent decline. The June advance is a welcome rebound for in indicator that has contracted for 14 of the last 19 months, although on a quarterly basis, Industrial Production has contracted for the past three-quarters.

Here is the overview from the Federal Reserve:

Industrial production increased 0.6 percent in June after declining 0.3 percent in May. For the second quarter as a whole, industrial production fell at an annual rate of 1.0 percent, its third consecutive quarterly decline. Manufacturing output moved up 0.4 percent in June, a gain largely due to an increase in motor vehicle assemblies. The output of manufactured goods other than motor vehicles and parts was unchanged. The index for utilities rose 2.4 percent as a result of warmer weather than is typical for June boosting demand for air conditioning. The output of mining moved up 0.2 percent for its second consecutive small monthly increase following eight straight months of decline. At 104.1 percent of its 2012 average, total industrial production in June was 0.7 percent lower than its year-earlier level. Capacity utilization for the industrial sector increased 0.5 percentage point in June to 75.4 percent, a rate that is 4.6 percentage points below its long-run (1972–2015) average. [view full report]

The chart below shows the year-over-year percent change in Industrial Production since the series inception in 1919, the current level is lower than at the onset of 16 of the 17 recessions over this time fame of nearly a century. The only lower instance was at the start of the eight-month recession at the end of World War II.

Capacity Utilization

The Fed's monthly Industrial Production estimate is accompanied by another closely watched indicator, Capacity Utilization, which is the percentage of US total production capacity being used (available resources includes manufacturing, mining, and electric and gas utilities). In addition to showing cycles of economic growth and demand, Capacity Utilization also serves as a leading indicator of inflation.

Here is a chart of the complete Capacity Utilization series, which the Fed began tracking in 1967. The linear regression assists our understanding of the long-term trend. We've highlighted the post-recession peak in November 2014.

The latest reading is well off its interim peak and slipped below the regression during the summer of 2015.

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.

Current Assessment and Outlook

The US economy has been slow in recovering from the Great Recession, and the overall picture has been a mixed bag for well over a year and counting. Employment and Income have been relatively strong. Real Retail Sales have been weak at best over the past year, and Industrial Production has essentially been in a recession.

Here is a percent-off-high chart based on an average of the Big Four. The interim high was in November 2014. The indicator responsible for this decline is Industrial Production. Incidentally, the last time the average of the four set an all-time high was in January 2006.

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