June industrial production rose 0.3% m/m and is up 2.0% over the past 12 months. The year over year change in industrial output continues on a path of slowdown, and suggests the economy is muddling along. The level of production remains below the pre-Great Recession peak.
Details of the report indicated that manufacturing output rose 0.3%, mining output bounced 0.8%, and utility output dipped 0.1%. Utility output has declined three straight months after posting a 5.0% m/m gain in March.
The year over year change in the ratio of coincident to lagging indicators is a predictor of the growth rate in industrial production. It argues for further weakness.
Historically, GAAP earnings for the S&P 500 have correlated with industrial production (see the chart). Industrial production rose 0.7% q/q between Q2 and Q1 2013 using an average of the monthly data. Although this is unexciting, it is consistent with the sequential change over the past three quarters. Unless production shows a sharp gain, it looks like the estimates for first half 2014 EPS are too high at just over $30/share for each of Q1 and Q2 2014.
After viewing the industrial production data, I’d like answers to the following questions. Tell me what you think:
Does the slow trend in industrial production worry you as an investor?
Will the trend in industrial production and the ratio of coincident to lagging indicators cause Chairman Bernanke to be dovish at tomorrow’s testimony?
Is the weak trend in production a reason for yield seeking investors to move back into utilities (utilities have rallied sharply in recent days)?