IP and Cap Ute

April 16th, 2014 10:00 am | by John Jansen |

Via Pierpont Securities:

Industrial production was much stronger than expected.  The March gain of 0.7% easily outpaced forecasts (especially mine) and there was a massive upward revision to the February figure, from +0.6% to +1.2%.  Thus, notwithstanding the weather, industrial production is 1.7% higher in March than in December.  Given the inventory overhang that the economy entered the year with, this is astonishing to me, but there is no arguing with the cold hard data.  Similarly, manufacturing output dipped in January and roared back in February and March.  These data introduce a risk that my Q1 GDP forecast is too low because inventory accumulation may not have normalized.  Still, as the financial sector learned in 2008, you can’t keep ratcheting up an unsustainable situation further without eventually causing a bust and one hellacious hangover.  Inventory growth cannot continue to exceed $100 billion (annualized) per quarter, though this report certainly suggests that factories are blissfully uncaring about the issue for now.

Capacity utilization shot up to 79.2%, the highest reading since 2008.  The level of capacity usage remains relatively soft on a historical basis, but for what it’s worth, we did not attain this level of capacity utilization in the prior cycle until December 2004, at which time the FOMC was already hiking rates for the 5th time (to be fair, the unemployment rate then was 5.4).  The markets so far seem to have faith that Chair Yellen and company know what they’re doing.  We’ll see.

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