Industrial Production As A Leading Indicator

January Industrial Production was aweful falling 1.8% month over month. Leading the charge was a 2.5% drop in manufacturing output. Since auto companies shuttered in production and cut capacity in the month I guess we should not be too surprised. In fact auto assembly units fell to 3.9 million units (this is an annualized figure). This in turn drove manufacturing capacity utilization to 68%. This an all time low for this 61 year old data series.

Unfortunately this isn't where the pain ends. We know that inventories are at decade highs. My guess is that sales will remain weak for a prolonged period of time due to consumer balance sheet repair and the fact that we pre-bought too many vehicles in the last few years of our debt-fuelled comsumption binge. The underlying trend of owning a vehicle for 10 years or more is going to come back in vogue.

In the mean time as auto production continues to be curtailed (until inventories can be worked through) all associated industries should suffer as well. These include plastics, textiles and everything else involved in the auto industry. These numbers have not come through in the industrial production as of yet. Industrial production as a leading indicator is not turning any time soon. This is true of every country globally.

The ISM (I prefer using NAPM but should use the current acronym) increase we saw last month looks to be a small positive blip in a very negative trend. Global industrial demand is in absolute freefall, the Empire State manufacturing survey and todays IP point to a sharp decline in ISM.

I would not like to be a long only fund manager at this point. There would few places to hide. I wonder how investors will feel when they see that there mutual fund beat the index by 30 basis points but was still down 30% this year. Its going to be messy. I would move into long / short fund (make sure there is no long bias please and little leverage) or opportunistic hedge funds that can capitalize without the market moving higher.