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Monday, September 15, 2008

Industrial Production - tech caught in the downdraft too

Nearly lost in the din surrounding the failure of Lehman Bros and the take-over of Merrill Lynch was the industrial production and capacity utilization report.

The Federal Reserve released the numbers for August today. The results were below economists expectations and did nothing to help the tone of the market.

As I have been trying to focus my writing on the technology and Internet sectors, in my review of the Fed's report I'll provide a little overview and then concentrate on the results in high-tech.

What it is --

The index of Industrial Production is a fixed-weight measure of the physical output of the nation's factories, mines, and utilities. Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report. 2002 is used as a reference and corresponds to 100%.

August results --

Industrial production decreased 1.1 percent in August and was revised down in June and July to show smaller gains of 0.2 percent and 0.1 percent respectively. After little movement over the previous three months, factory output was down 1.0 percent in August, in part because of a drop of 11.9 percent in the production of motor vehicles and parts. Excluding motor vehicles and parts, the index for manufacturing decreased 0.3 percent.

The chart below, courtesy of, shows the month over month percentage changes output:

This next chart is from the Fed's web site and it provides an overview of most major sectors though tech is not included. Both industrial production and capacity utilization are displayed. The overall situation is that most of the charts are showing a distinct downward trend.

This next chart provides the detail on tech or "high-technology industries" as it is referred to by the Fed.

A reader needs to be careful with the top two charts in the high-technology grouping. Instead of providing the simple numbers for the sector these two charts compare total Industrial Production (in black) and Industrial Production excluding hi-tech (in red).

There are two takeaways:
  1. Tech is not immune to the global economic downturn. The sector has been the beneficiary of export-driven growth most of this year but the last couple of months show a distinct slowing with August showing contraction.
  2. The vertical gray bars on the charts identify periods of recession. When month-over-month growth in Industrial Production goes negative, it seems that recession eventually follows. We have that situation happening now. The close tracking between total Industrial Production and Industrial Production excluding high-tech indicates that tech is entering a downturn along with other industrial sectors and that the economy in general could be teetering on the brink of recession.
In summary --

Tech doesn't look much like a safe haven. Indeed, it appears that there are no safe havens. When growth in Industrial Production goes negative to a significant degree, the risk of recession increases strongly.

The Industrial Production numbers may not reflect the kind of disaster that is playing out in the financial sector; nevertheless, it appears that a real slowdown is underway. The ramifications could be unpleasant including loss of jobs and corresponding pressure on consumer spending as well as drooping GDP. We may not be in a recession yet but it seems like it's not much fun to be an investor these days.

Sources: Federal Reserve Statistical Release: Industrial Production and Capacity Utilization (G.17)

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