Skip to main content

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 Briefing.com, 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)

Comments

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.

This first post in the series starts at the beginning: getting good investment ideas.

Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.

As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and …

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to lo…

Durable Goods report for Sept just so-so but Computer segment is on fire

The Durable Goods advanced report for September 2011 was released on Wednesday.

I like to dig into the Durable Goods report because it can be useful for seeing how tech in aggregate is performing and how the sector may perform in the future. I always focus on two particular measures: shipments and new orders. Let's see how it played out last month.

Shipments -- 

I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how September shipments looked for the overall tech sector:


Results for the overall tech sector were a bit weak but take a look at the next chart which tracks the Computers and related products segment:


Results here were actually quite good and, to make things even better, the previous month was revised upward.

N…