An Upside November Surprise In Industrial Activity

Industrial production beat expectations by a hefty degree in today’s November update. Output increased 1.1%, well above most estimates, including The Capital Spectator’s forecast for a modest 0.3% rise. In addition, October’s mild contraction was revised up to a modest gain. Although today’s release is good news for the economy, the trend may not be as strong as the latest monthly change implies. Nonetheless, it’s clear that industrial activity has picked up lately, which suggests that moderate growth in the near term remains a compelling macro prediction.

Meantime, it’s hard not to be impressed with the latest numbers. Industrial production’s 1.1% surge for November is the best rate of monthly growth in a year. The sight of the manufacturing slice of activity inching higher in November only strengthens the case for arguing that the expansion in the industrial sector is widespread.

More importantly, the year-over-year numbers show that industrial production’s pace has rebounded in recent months. For the first time since mid-2012, the Fed’s industrial production index has posted annual rates of growth above 3% for three months running. The deceleration that afflicted this indicator in the first half of this year (the low point was this past July’s dip to a mere 1.5% gain over the year-earlier month) has since given way to a substantially stronger set of comparisons.

We also learned today that the initial estimate of the US Manufacturing PMI for December continues to signal a healthy rate of growth through the end of 2013. “The flash PMI remained surprisingly high in December, suggesting strong growth momentum in the goods producing sector,” noted Markit’s chief economist in today’s press release (pdf). That’s a clue for thinking that the encouraging numbers in today’s November industrial production data will carry over into this month when the Fed publishes its next report for this indicator.

It may be a shock in some circles to discover that industrial activity has been growing by 3%-plus a year in recent months, but the broader implications for the business cycle aren’t terribly surprising. Although some pundits are prone to anecdotal evidence and outlier numbers in the regular updates on economic data, a broad review of the big-picture trend has remained consistently upbeat, as the monthly reviews of the Economic Trend & Momentum indices remind (here’s last month’s report, for instance).

Although the strong rise in industrial production for November is only one number, it’s one of several data points that suggest that business cycle risk remains low for the US. That’s been the message all along, albeit with some rocky periods at times. But an objective, broad-minded search for compelling clues that a new recession is near have turned up few persuasive warning signs in recent history. Today’s news on industrial production certainly doesn’t change this record.

This piece is cross-posted from The Capital Spectator with permission.