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Monday, September 17, 2012

Industrial production

The industrial production data showed a rather large decline in Aug.  This is one piece of data that has been strong since the recovery began.  Here is a long term chart with IP and SPX.

It is clear that significant down turns in IP coincide with down turns in stocks.  However, down turns in stocks do not always cause drops in IP.  Notice the crash of 87 had very little affect on IP.  Lets zoom in on this chart a bit.

Since 2009, the rather large dips in stocks did not cause noticeable drops in IP.  No recession happened and this led to eventual new highs in stocks.  Notice the dip in IP in the last report though.  Lets zoom in on a percent change chart to make this more obvious.

There are very few negative changes of this magnitude on this chart and all but one were during a recession.
Here is a slightly different version of the percent change chart.

The second chart shows quite a few more changes of similar magnitude then the first chart.  Not all of those drops were associated with recessions.  On both charts, this is the biggest drop in IP since the recovery began.

I would suspect that Bernanke already knew this before it came out and it might have been an input on the new QE decision.  With so much other data already looking recession like (i.e. the big drop in durable goods), this was one of the few hold outs.  This drop makes sense based on the manufacturing data we have seen over the summer.  First new orders dropped, then backlogs started to drop, and most recently production was being hit.  This is the kind of drop that can be a sign we are in recession.  The key going forward will be new orders.  Without a pickup in new orders, the IP will continue to drop and most likely layoffs will start to pick up.  If that happens, will the past history of the relationship between drops in IP and drops in stocks still hold despite QE?


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