With the Fed slated to start its latest two-day FOMC meeting tomorrow, economic data released today is being viewed through the prism of what it might mean for monetary policy more acutely than usual.
By Peter Martin
Monday, September 15, 2014
Industrial production was the most notable of the day’s macroeconomic indicators and showed a surprise decline in August, which has fed into declining share prices on Wall Street. The Industrial Production report is a monthly series of indices compiled by the Federal Reserve covering the industrial sectors of manufacturing, mining, gas and electricity. The production index, which measures real output against 2007 as a base year, shrank 0.1% in August, following a downwardly-revised 0.2% increase in July (originally reported as +0.4%). The consensus estimate had been for a 0.3% gain in August.
Capacity utilization, which measures the ratio of industrial production to full sustainable practical capacity with a large weighted bias to manufacturing (roughly speaking, how much factories are being used as percentage of their maximum realistic production potential), also decreased, falling to 78.8% in August compared to 79.3% in July. After several months of manufacturing being at the forefront of the economy, the slide in manufacturing comes as a surprise (the manufacturing component of the production index slid 0.4%), but it remains to be seen whether this is just a transitory blip or the start of a trend of economic softness.
The findings of the latest Empire State Manufacturing Survey would point to the former, with the New York Fed’s index of manufacturing conditions surging to a reading of 27.54 this month. This is a very strong result at the headline level, but the details below the surface are not quite as encouraging. The forward-looking component of new orders did improve, but only to 16.86 compare to August’s 14.14, while the number of employees diffusion index declined, as did the average employee workweek index.
By mid-afternoon in New York, the US stock markets were broadly in the red: the S&P 500 index was down 0.20% or 4.0 points at 1981.5, though the narrower Dow Jones Industrial Average index was up 0.15% or 25 points at 17012, thanks to rises in IBM and Visa, the two most heavily weighted component in the DJIA.
Downward pressure on commodity prices has been maintained by data released at the weekend showing Chinese industrial production grew 6.9% year-on-year in August, its slowest pace since the dark days of the financial crisis in 2008. Us light crude futures dropped below $91 a barrel earlier in the session before mounting a small comeback.
Looking ahead to the FOMC meeting, expectations are for no change in terms of rates and no diversion from the path of stimulus reduction that has been common to all FOMC meetings this year, meaning the focus is likely to be on an the forward guidance for rates. The softer capacity utilization figures and dropping energy prices suggest the inflation outlook is unlikely to be troubling the Fed too much, and the chances seem slim for any signals that accommodative monetary policy will be abandoned in the near future.
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