Recession Indicator Flashes: Should You Be Worried?
Is the U.S. economy flashing a warning sign? Industrial production sank in April, defying low expectations of a flat reading. It was the fifth monthly contraction in a row.
The last two times that the U.S. saw at least three straight months of declining output -- in late 2000 and early 2008 -- the economy was in recession or about to be.
Q1 GDP, first reported as a 0.2% annualized gain, likely will be revised to show a contraction.
But there are some differences this time. Manufacturing, a key part of industrial production, has managed some monthly gains in 2015, unlike prior sustained slumps in overall output. It was flat in April.
Most analysts believe that recent economic weakness was, in the words of Federal Reserve policymakers, "transitory," based on bad weather, a ports slowdown and a reeling energy sector.
"Manufacturing has clearly slowed," said Jim O'Sullivan, chief U.S. economist for High Frequency Economics. But, he pointed out, manufacturing accounts for only about 12% of the economy, and recent data like ISM's purchasing managers indexes show robust service-sector growth while manufacturing hovers at neutral.
"When you put them both together, the net of those two is still a pretty healthy looking trend," O'Sullivan said. "Overall growth is still pretty solid, notwithstanding the weak GDP number."
Energy Sector Sputters
Industrial production fell due to its other main components. Utility output fell 1.3% after diving 5.4% in March. Mining slid 0.8%, the sixth monthly drop in seven, due to energy sector woes.
The plunge in oil prices that began in June has jolted the economy as energy companies have slashed capital spending and activity. They also cut 15,000 mining jobs in April, Labor Dept. data show.
Many economists, including Fed policymakers, had assumed that oil's boosting consumers' purchasing power would more than offset its negative impact.
But consumers don't buy it. Retail sales continue to disappoint, while the University of Michigan's May sentiment gauge, out Friday, showed the steepest drop since December 2012, when the "fiscal cliff" loomed.
"Consumers became increasingly convinced that there would be no quick and robust rebound following the dismal 1st quarter," the Michigan report said.
The most recent IBD/TIPP Economic Optimism Index showed a smaller drop in May but also a return to pessimism.
O'Sullivan still has faith in the consumer. Michigan's expectation gauge fell but remains 6 points higher than last year, he pointed out. He also believes that industry will recover modestly, if not rebound strongly.
"We're probably past the worst for manufacturing," he said, noting gains in ISM's April new orders and new export orders.
Other analysts are less bullish.
"We see a further drop in mining investment over the next few quarters and are not convinced that business investment ex-mining will be strong enough to sufficiently offset this drag," economists at Bank of America Merrill Lynch wrote in a research note.
"Our forecast for GDP growth continues to slide," with estimates of -1.2% in Q1 and 2.5% in Q2, they wrote.That's not booming, but it's not a recession.
O'Sullivan sees one certain signal amid all the noise. Jobless claims, a key leading economic indicator, are hovering at lows not seen since 2000. That's consistent with payroll growth of over 200,000 a month, he said
The last two times that the U.S. saw at least three straight months of declining output -- in late 2000 and early 2008 -- the economy was in recession or about to be.
Q1 GDP, first reported as a 0.2% annualized gain, likely will be revised to show a contraction.
But there are some differences this time. Manufacturing, a key part of industrial production, has managed some monthly gains in 2015, unlike prior sustained slumps in overall output. It was flat in April.
Most analysts believe that recent economic weakness was, in the words of Federal Reserve policymakers, "transitory," based on bad weather, a ports slowdown and a reeling energy sector.
"Manufacturing has clearly slowed," said Jim O'Sullivan, chief U.S. economist for High Frequency Economics. But, he pointed out, manufacturing accounts for only about 12% of the economy, and recent data like ISM's purchasing managers indexes show robust service-sector growth while manufacturing hovers at neutral.
"When you put them both together, the net of those two is still a pretty healthy looking trend," O'Sullivan said. "Overall growth is still pretty solid, notwithstanding the weak GDP number."
Energy Sector Sputters
Industrial production fell due to its other main components. Utility output fell 1.3% after diving 5.4% in March. Mining slid 0.8%, the sixth monthly drop in seven, due to energy sector woes.
The plunge in oil prices that began in June has jolted the economy as energy companies have slashed capital spending and activity. They also cut 15,000 mining jobs in April, Labor Dept. data show.
Many economists, including Fed policymakers, had assumed that oil's boosting consumers' purchasing power would more than offset its negative impact.
But consumers don't buy it. Retail sales continue to disappoint, while the University of Michigan's May sentiment gauge, out Friday, showed the steepest drop since December 2012, when the "fiscal cliff" loomed.
"Consumers became increasingly convinced that there would be no quick and robust rebound following the dismal 1st quarter," the Michigan report said.
The most recent IBD/TIPP Economic Optimism Index showed a smaller drop in May but also a return to pessimism.
O'Sullivan still has faith in the consumer. Michigan's expectation gauge fell but remains 6 points higher than last year, he pointed out. He also believes that industry will recover modestly, if not rebound strongly.
"We're probably past the worst for manufacturing," he said, noting gains in ISM's April new orders and new export orders.
Other analysts are less bullish.
"We see a further drop in mining investment over the next few quarters and are not convinced that business investment ex-mining will be strong enough to sufficiently offset this drag," economists at Bank of America Merrill Lynch wrote in a research note.
"Our forecast for GDP growth continues to slide," with estimates of -1.2% in Q1 and 2.5% in Q2, they wrote.That's not booming, but it's not a recession.
O'Sullivan sees one certain signal amid all the noise. Jobless claims, a key leading economic indicator, are hovering at lows not seen since 2000. That's consistent with payroll growth of over 200,000 a month, he said
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