The Fed released its Sept Industrial Capacity numbers a few days ago. Overall numbers are starting to look consistently positive. However, durable manufacturing and machinery manufacturing still remain at depression level capacities. Here is the headline paragraph from the Fed's release:
INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION
Industrial production rose 0.7 percent in September after an upwardly revised gain of 1.2 percent in August. For the third quarter as a whole, output advanced at an annual rate of 5.2 percent, the first quarterly gain since the first quarter of 2008 and the largest gain since the first quarter of 2005. Production in manufacturing increased 0.9 percent in September, and the index excluding motor vehicles and parts rose 0.5 percent. Mining output strengthened 0.7 percent, while the output of utilities fell 0.7 percent. At 98.5 percent of its 2002 average, total industrial production was 6.1 percent below its level of a year earlier. In September, the capacity utilization rate for total industry increased to 70.5 percent, a level 10.4 percentage points below its average for 1972 through 2008.
The Fed has some good news to report and it is pleased to highlight Manufacturing Output (seasonally adjusted) is rising. However, the canary-in-the-coalmine is utility output dropped 0.7% in September. Utility output drops but Industrial Output increased ? Gudovac suspects some bug in the seasonal adjusting occurred.
Owners can conclude from the drop in utility output that companies which supply to utilities are not going to see their order books grow - ABB and AMSC are prime examples.
Digging deeper into the numbers and we see some areas of grave concern. The 2 charts Gudovac examines each month highlight the subject.
The first chart indicates how large the output gap is in total Industrial Production. The uptick in output is a welcome change. However, the gap between capacity and output remains vast.
Owners can conclude that Heavy Manufacturing will not return to boom era levels until the capacity gap is reduced. Companies will not invest in expanding capacity until demand pushes them ( D'oh ). Owners can guesstimate the correlation between change in the out put gap and increases in capacity by examining recovery from past recessions indicated on the chart.
The second chart from the Sept report is disquieting. This shows the sub-set of Equipment output. There was a sharp jump in Defense and Space related equipment in Sept. Gudovac suspects that this increase accounts for nearly all of the month-to-month growth in output. Business output certainly did increase, but at a small rate.
Owners need to screen their companies to understand which companies are dependent on Defense and Space related orders and which are not. Understanding this relationship how the second chart flows through to one's company, is important to fathom exactly how the 'recovery' will impact your company(ies).
The September Fed Report indicates that a bottom may have been reached in Industrial Output. It does not indicate the scope and scale of a recovery - yet. The output gap is large. Even sharp increases in demand will require years to close the gap. Output gaps of this magnitude have profound implications for pricing, margins, and cash flow.
Owners should be clear the US industrial sector remains mired in a depression level output gap and will remain so for in the medium term.
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Don't Get Massacred !
Gudovac1941@gmail.com
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